Mega Trend


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Following up on my last two issues on the flow of investment into China (see Free Flow and Investing in China in case you missed them), I would just like to add that I have had some personal experience of talking to Australian based institutional investors about investing directly into Chinese A shares over many years, including introducing them to successful Chinese fund managers who were keen to promote their domestic capabilities and access Australia’s then A$1 trillion+ pool of superannuation assets (now $3 trillion). I even once spoke at the annual ASFA Conference in 2011 to a group of superannuation fund managers who thought that “I must be smoking something” when I suggested that they should consider investing directly into China’s A share market.

In those days it was unusual for an institutional fund manager to allocate funds into one single market (like China or India, or even Japan and Korea) and instead they would buy an Asian fund, or an Emerging Markets basket, to diversify risk and access the local expertise of a specialist manager who would make the allocations and decisions on their behalf (for a fee, of course). Considering how much work and effort went into analysing local domestic Australian shares (a relatively small market in global terms) I thought that this was a “cop out” and a somewhat lazy approach and I may have mentioned this a few times (which probably didn’t help my cause at the time!)

For many years, those of us who follow these developments closely have predicted that the apathy towards investing directly into Chinese equities would change when MSCI increased the weight of China A shares in the MSCI Indices to reflect the growing influence and contribution of Chinese companies within the global economy. In the last two years, the ‘inclusion factor’ for China A shares in the MSCI Emerging Markets Index has increased from zero to 20% which has forced foreign managers to significantly increase their China A share exposure to at least match the MSCI Benchmark. Whilst these relatively minor adjustments may not have attracted wide scale media and industry attention, the amounts involved stretch to many billions, if not trillions, of institutional fund flows, and this is one of the reasons for the strong performance of the China A share market in recent months.

It’s hard to make any predictions about anything these days. But I would suggest that we’re probably witnessing the start of a “mega-trend”. You heard it here first!


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