Research Press Release
Credit Suisse hosts the 6th China A-shares Conference in Shenzhen
With global index providers such as MSCI, FTSE Russell, and S&P Dow Jones Indices set to expand the weighting of China A-shares in their index portfolios in the coming months, investing in China A-shares is increasingly more relevant. The Credit Suisse China A-shares Conference offers institutional investors and corporates a timely opportunity to explore the investment potential of the China A-share market, as global index providers accelerate its pace of inclusion.
Vincent Chan, Head of China Equity Strategy Research at Credit Suisse, said, "The move by global index providers to accelerate the inclusion of A-shares to benchmark indices is an acknowledgement of the progress China is making with its reforms and opening up its capital market. It is also indicative of the growing interest of overseas investors in A-share allocation."
Credit Suisse estimates that the MSCI inclusion alone could attract inflows of ~USD 50 billion in fresh foreign capital to the Chinese domestic market this year. As of end-2018, foreign investment in the A-share market reached RMB 1.2 trillion (USD 178.2 billion), doubling its size from 2016, and constituting 7% of the A-share free-float market capitalization.
"It took the Korea and Taiwan markets seven and ten years, respectively, to reach a 100% inclusion weighting. Judging from the China Securities Regulatory Commission (CSRC)'s stance of deepening the country's capital market reforms, we believe the China A-share's full inclusion may come at a faster pace than expected," Mr Chan added.
As a major reform initiative in 2019, the CSRC approved the launch of a first batch of seven tech board funds, with each fund raising up to RMB 1 billion. Commenting on this reform, Mr Chan noted, "All domestic funds, including Qualified Foreign Institutional Investors (QFII), will be able to invest in the tech board. We expect to see high investment enthusiasm from investors, despite the recent waning market sentiment. We believe the CSRC is likely to relax IPO rules, leading to more companies tapping the market."
According to HOLT® data, Credit Suisse's proprietary analytical platform, the earnings cuts of China A-shares appear to be bottoming out, after months of negative cash flow return on investment (CFROI) revisions (proxy of earnings downgrades). Despite the CSI 300 being up by 30% year to date, valuations still appear to be reasonable, with current HOLT price-to-book (P/B) at 1.4x, trading below its long-term median of 1.55x.
Commenting on the first quarter earnings of A-share companies, Mr Chan said that the 2019 consensus growth has turned out to be quite positive for most sectors. The most significant consensus earnings improvements are in non-bank financials, transportation (especially airlines), IT and real estate. In contrast, earnings in the energy sector are likely to see a contraction in 2019. Looking ahead, Credit Suisse favors relatively defensive and laggard names, particularly in the property, banks, insurance and consumer discretionary sectors.
Differentiated capabilities for the China A-Share market
As a leading broker in Asia Pacific, Credit Suisse has a strong Equities franchise across Sales, Trading and Research in the region. Through its securities joint venture in China – Credit Suisse Founder Securities (CSFS) – Credit Suisse is one of the very few global banks that can offer direct access to the China onshore equity markets. Last month, Credit Suisse announced plans to increase its shareholding in CSFS to a 51% controlling stake.
Credit Suisse is also expanding its footprint in electronic trading in China. Through a partnership with CSFS, the bank is rolling out its Advanced Execution Services (AES) platform to the domestic China market. The AES platform enables Chinese onshore and foreign institutional investors to trade China A-shares, using the same recognized algorithms as international investors use for trading A-shares via Stock Connect.
Credit Suisse has one of the most comprehensive and highly recognized China Research coverage capabilities. The Credit Suisse Equity Research team covers over 430 Chinese-listed stocks, including about 160 domestic A-shares, which represent over 70% of the CSI-300 index constituents by market capitalization. In addition, the HOLT platform also covers close to 1,900 A-share companies and more than 2,850 stocks across Hong Kong and mainland China.
Combining the bank's market-leading global Equities franchise and unique A-share brokerage offering, Credit Suisse plays an important role in bridging onshore China capital to the global markets and foreign capital to onshore China.