China Is a Stock Picker’s Paradise
Mainland markets offer outsize opportunities for stock pickers, but for how long?
In recent years, it has become easier for global fund managers to invest in Shanghai and Shenzhen-listed shares, thanks to programs such as Stock Connect, a trading link with Hong Kong.
This could be a fertile hunting ground for savvy investors.
China Has Been Unusually Good for Active Managers
In China, foreigners who don’t just replicate an index have tended to beat their benchmarks by a wide margin—unlike in much of the rest of the world
That Might Be Because Its Markets Are Choppy…
The Chinese market is notorious for its dramatic moves, including the surge at the start of 2019. The average daily swing in the Shanghai Composite has overshadowed its peers in the U.S., Japan, and the U.K. in nine of the past 12 months.
...And Mom and Pop Investors Play an Outsize Role
A lot of trading is done by individuals, who are often armed with leverage and pile into hot stocks. Even institutional investors remain relatively green, with the average portfolio manager having an average of just over three years of experience, according to a report from Allianz Global Investors, citing UBS data.
For nimble managers, that could create more opportunities to scoop up bargains or sell out of other positions at rich prices.
Beating the Market Matters, Too
For all the swings, Chinese shares have had something of a lost decade. That bolsters the case for effective active management.
Among foreign funds monitored by Morningstar, standouts include funds managed by Aberdeen Standard and UBS, which have returned more than 45% in the two years through March.
One important question: How long will Chinese markets offer outsize opportunities for stock pickers?
Benchmark providers such as MSCI are increasing the importance of mainland Chinese companies in popular gauges for emerging markets. In time that should lead to a more efficient—but perhaps less exciting—market.