279 Active GEM Funds, AUM $370bn.
China A-Share Deep Dive
In this piece we provide a comprehensive analysis of China A-Share positioning among active EM funds. We find that the growth in China A-Share exposure has slowed as we approach full ownership across the active funds in our analysis. China A-Share allocations have remained solid throughout this year’s volatility and heavy country rotation, though managers have rebalanced within the A-Share universe. Midea Group, Kweichow Moutai and Contemporary Amperex Technology remain the most widely held stocks, but others are starting to make their mark.
Time-Series Ownership Analysis
China A-Shares have seen significant ownership growth over the last decade, with an ever increasing number of funds registering some kind of investment in China’s onshore stock market. Current average fund weights of 5.99% and 87.8% of funds invested sit close to the all-time highs, with active funds positioned overweight the benchmark by +0.90%, on average. However, as we approach full ownership the rate of growth has naturally slowed.
Over the last 5-years, A-Shares have cemented themselves as part of the China & HK investment landscape. China A-Share allocations now account for 20.2% of the total China & HK active fund weight, compared to 16.3% for the iShares MSCI EEM ETF. Again, the rate of growth of has ground to a halt, with that ratio of 20% remaining largely constant since late 2021. It feels as though A-Shares are reaching a natural equilibrium of sorts, at least for now.
Country Analysis
If taken as a standalone country allocation, China A-Shares are the 6th largest country holding on an average weight basis and the 8th largest on a funds invested basis. A-Shares have a lot in common with Brazil, with both occupying a standalone 2nd tier after the big 4, and both representing key overweights for active EM investors, with more than 50% of managers positioned ahead of the iShares MSCI EM ETF.
Ownership changes across EM countries over the last 6-months highlight the pause in the growth of China A-Share allocations. As rebalancing occurs in decent size between other countries (Russia, Taiwan, SK out – MENA, ASEAN, Brazil in), A-Shares have maintained a steady presence in active EM portfolios, with all measures of ownership barely moving over the period.
Country Sentiment
The chart below shows where current positioning in each Country sits versus history going back to 2008 on a scale of 0-100% (y-axis), against a measure of fund activity for each sector between 02/28/2022 and 08/31/2022 (x-axis).
China A-Shares sit in the top-right quadrant though towards the centre of the Grid. This is indicative of near record positioning yet neutral momentum. Brazil, MENA and selected ASEAN nations are capturing the bulk of the rotation as Russia, Taiwan and South Korean allocations are scaled back.
Sector Positioning & Activity
On a sector level, the trio of Industrials, Consumer Staples and Consumer Discretionary dominate the China A-Share landscape. All three are the most widely owned sectors among active GEM managers and the key overweights compared to benchmark. Financials are the only major underweight, whilst Real Estate, Communication Services, Energy and Utilities are largely avoided by EM active funds.
Sector activity over the last 6-months has favoured Consumer Staples and Utilities, with average weights rising in conjunction with an increase in funds invested for both. Against this, EM funds reduced exposure to Consumer Discretionary and Information Technology stocks, with 1.4% and 2.2% of funds closing exposure respectively and all measures of ownership falling over the period.
Sector Evolution
The evolution of China A-Share sector weights can be seen in the charts below. Whilst the top 7 sectors have seen strong investment growth over the last decade, all but Industrials, Consumer Staples and Utilities have stalled over the last 12-months.
Fund Holding & Style Analysis
On a fund level, the majority of EM managers hold less than a 14% allocation in China A-Shares, with 50% of managers sandwiched between the lower and upper quartiles of 3.5% and 8.9%. At the lower end are the 24 funds with no exposure and the top end 9 funds above 14%, topping out at 26.15%.
The largest holders are a mixture of Value and Growth funds, led by Lazard Emerging Markets Managed Vol (26.15%) and VP Bank EM Risk Optimised ESG (25.94%). On average though, the Style split shows A-Shares more favoured by Aggressive Growth and Growth investors, with Value funds the most lightly allocated.
Fund Activity & Long-Term Style Trends
Fund activity between 02/28/2022 and 08/31/2022 is fairly evenly split between those increasing and those decreasing allocations. Aggressive Growth funds were perhaps the standout, with new positions from Jupiter Global Emerging Markets (+5.12%) and BNP Paribas Emerging Equity (+3.92%) helping to push allocations higher by +0.35%, on average.
Over the longer-term, Aggressive Growth and Growth Funds have moved ahead of their Style peers, growing their overweights to close to record levels, whilst GARP, Value and Yield funds are maintaining a moderate underweight, on average.
Stock Holdings & Activity Analysis
The most widely held stocks are Midea Group, Kweichow Moutai and Contemporary Amperex Technology, all held by over a fifth of the managers in our analysis and overweight the benchmark, on average. A further 11 stocks are held by more than 10% of managers, led by LONGi Green Energy Technology and NARI Technology. High conviction positions are spread across a wide range of stocks, though Kweichow Moutai is a common presence among the top 50.
Indeed, activity over the last 6-months has favoured Kweichow Moutai, with a further +3.60% of funds buying in to the stock and combined inflows of $243m. China Yangtze Power, NARI Technology and Midea Group have also seen ownership levels rise, whilst Hundsun Technologies, Aier Eye Hospital Group and Contemporary Amperex Technology provided balance on the sell side.
Stock Holdings by Style
Split by Style, Midea Group is a top 3 holding for Aggressive Growth, Growth, Yield and Value investors, though largely avoided by GARP. Yield investors prefer Inner Mongolia Yili Industries by some margin, whilst Value funds place a greater weight on Gree Electric Appliances. Shenzhen Inovance Technology and Foshan Haitian Flavouring are well held by Aggressive Growth managers, but avoided elsewhere.
Conclusions
Our data shows a level of consolidation among active EM investors towards China A-Share stocks in 2022. Far from being a negative signal, it reflects a state whereby nearly all funds are invested and selected managers look to take profits on long-term positions and/or look for new opportunities.
Indeed, 2022 has been an active year for country rebalancing given the removal of Russia from active EM portfolios and a move from high growth sectors to ones more Value aligned. The fact that A-Shares have maintained their weighting in EM portfolios throughout speaks of a high level of long-term conviction.
The China A-Share stock universe is vast, with over 750 companies attracting some form of investment from the managers in our analysis. The chart to the right shows a list of ‘upcoming stocks’. Those that were owned by less than 5% of the managers in our analysis 6-months ago and have seen ownership levels rise since then. Stocks such as Wen’s Foodstuff Group, with new positions from Nordea Stable Emerging Markets (+1.81%) and GS Emerging Markets CORE (+0.86%), or Ming Yan Smart Energy Group, with new positions from Candriam Sustainable EM (+1.70%) and Amonis Equity Emerging Markets (+1.46%).
As the A-Share universe evolves, these stocks may feature more heavily among active EM investors in the future. For now though, we’ve included 5 stock profiles below from the current crop of most widely held stocks in the A-Share universe.
Kweichow Moutai Co. Class A
Midea Group Co. Class A
Contemporary Amperex Technology Co. Class A
NARI Technology Co. Class A
China Yangtze Power Co. Class A
For more analysis, data or information on active investor positioning, please get in touch with me on steven.holden@copleyfundresearch.com
Related Posts
