Following a recent exodus from Chinese stocks, JP Morgan Asset Management is planning to boost its investment into A-shares, and recently applied for a renminbi qualified foreign institutional investor (RQFII) licence.
The firm also reopened its $710 million JP Morgan China Pioneer A-Share Fund in June, after receiving $150 million of qualified foreign institutional investor (QFII) quota in May. It did not say when it had closed the fund.
The A-share strategy, aimed at retail investors, has seen small but steady inflows since it reopened, says Eddy Wong, head of intermediary business.
While the A-share market has experienced volatility recently on concerns about tightening liquidity – Shanghai’s CSI300 is down 7% since the start of the year – JP Morgan argues the recent correction has provided an attractive entry point for investors.
Lilian Leung, who runs the A-share fund, expects the market to see a turnaround in the third quarter. “In terms of earnings growth forecasts and valuations, the China A-share market has largely reflected all of these challenges at current levels,” she says.
Leung expects company earnings forecasts to be revised downwards after interim results are announced this month, and that China stocks will subsequently hit bottom. She estimates that this year’s companies’ earnings growth will be around 8-9% and will accelerate next year to 10-12%, arguing that there will be an upswing in equity markets in 2014.
Many fund houses, including Goldman Sachs Asset Management and Invesco, are relatively bearish on mainland financial stocks, and Grandmaster Capital has called China “a crash waiting to happen”. However, JP Morgan is overweight diversified financials, including property developments and brokers.
Leung admits such positions may be “controversial”, noting government policies typically create “headwinds against the property sector”, but says the story is different for big property firms, as they are better able to get financing and sell their properties for a profit. By her estimates, many can deliver 20% sales growth and provide decent equity returns. (JP Morgan lists China Vanke as an example of a top five A-share portfolio holding.)
The firm’s A-share fund must be at least 70% invested in A-shares, with a maximum of 30% in H-share, RMB treasury bonds, other fixed income assets and cash. At the moment, the fund has some 15% in H-shares.