CIFM's Sun expects tough year as MRF funds launch

The Chinese asset manager's co-head of equity funds predicts a difficult year ahead and further falls for A-shares, as the firm starts selling its first three mainland products in Hong Kong.
CIFM's Sun expects tough year as MRF funds launch

The co-head of domestic equity funds at China International Fund Management expects further falls in Chinese stocks but urged foreign investors to look beyond the headline negative sentiment for A-share opportunities. Sun Fang was speaking yesterday as the firm launched its first three southbound funds* under the mutual recognition of funds (MRF) scheme.

CIFM, a joint venture between JP Morgan Asset Management and Shanghai International Trust, starting selling the funds through 10 banks and also through independent financial advisers in Hong Kong, mainly targeting retail investors. JP Morgan AM is acting as its distribution agent for the products, which received regulatory approval on December 30.

The products will not be sold through insurance firms yet because MRF funds are subjected to quota limitations, said Elisa Ng, head of Hong Kong intermediary business at JP Morgan AM. The initial investment quota is Rmb300 billion ($45.6 billion) for MRF southbound flows, and only 50% of the value of a southbound fund can can be sold to Hong Kong investors.

Following the principle of ‘fair treatment’ under the Hong Kong-China fund passport scheme, the three funds will charge a redemption fee of 0.13%, as is usually charged for mainland fund sales.

CIFM's launch follows those of China AMC, GF Fund and HSBC-Jintrust, which started selling MRF southbound products in Hong Kong in late December, with China’s index circuit-breaker having caused a slight delay at the start of this year. So far 23 mainland funds have been approved for sale in Hong Kong.

But Chinese equities have continued to slump this year after a chaotic 2015, with the CSI300 index having lost 17.4% so far in 2016 to close yesterday at 3,081 points, or 42% down from its peak of 5,335 points in June last year.

The negative sentiment has arisen amid concerns over the economic slowdown in China, fears over a depreciating renminbi and general uncertainty about regulatory actions, epitomised by the widely panned stock-market interventions last year and in early 2016.

To its credit, the China Securities Regulatory Commission moved quickly to suspend the circuit-breaker last week and has acknowledged flaws in its regulatory approach in 2015.

But 2016 will continue to be a difficult year for A-share investors, and market swings will continue as the market correction is not yet over, said Shanghai-based Sun.

The circular-breaker accelerated the crash, but ultimately the A-share market was due a correction after rapid growth over the past three years, noted Sun. She expects to see more moments of market panic this year and argued that investors would need to have sound risk management and take action such as boosting cash positions and maintaining a relatively high portfolio turnover rate.

Still, Sun was upbeat about what she saw as an unprecedented amount of spare cash in China. There is a lot of liquidity outside the capital markets, she noted, whether in the form of enterprises’ cash deposits or household savings in banks’ wealth management products, and this capital is seeking higher returns.

Sun said this money had switched into stocks in recent years, but will not totally withdraw from the equity market as long as investors sought high returns.

Despite it being a tough market for stock-pickers, Sun said A-shares were fairly diversified across sectors and companies. She added that outperforming managers had been able to generate positive returns despite the CSI300 falling between 2010 and 2013. 

Chinese authorities have sought to open up the onshore equity capital market to attract global investors in recent years, but foreigners are more hesitant following the huge volatility and government interventions last year.

However, Sun said overseas investors should spend more time studying the A-share market because many investment opportunities are masked by headline risks.

* The three funds are: CIFM China Emerging Power Fund, CIFM China Multi-Assets Fund and CIFM China Sector Rotation Fund.

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