Outlook 2021: How to invest in China’s equity market

China A-shares' continued strong performance has spurred some investors to consider a more active investment approach while others are more circumspect.
Outlook 2021: How to invest in China’s equity market

Most investors are bullish on the prospects of China equities in 2021, and many are expected to take a more active investment approach when it comes to investing as they monitor regulatory and volatility risks.

A keen advocate of an active investing approach is Credit Suisse. The Swiss private bank noted in recent research that investing in A-shares in the coming year is a "once-in-a-lifetime opportunity", noting the increasing institutionalisation of the mainland's stock market. Others such as Pictet Asset Management and State Street Global Advisors are also positive (see table at the end).

So far this year, China A-shares have recorded relatively healthy returns, supported by the country’s economic recovery from the depths of the pandemic and the gradual easing of restrictions in its financial markets to foreign participation.

The Shanghai Stock Exchange Composite Index has risen as much as 26% while SZSE Component Index has climbed 42% to-date (December 15) from the lows reached on March 23.

Although the gains are not comparable to New York Stock Exchange’s more than 60% jump in the same period, investors see adding A-shares as one of the best ways for asset diversification and earning extra return under the current ultra-low interest rate environment.

Jonathan Tung,
Goldman Sachs AM

“We have seen more queries and interest in broader equities and Chinese equities in 2020, compared with previous years.” Jonathan Tung, co-head of fundamental equity client portfolio management for the Asia Pacific region at Goldman Sachs Asset Management (GSAM), told AsianInvestor.

The asset manager observed that the mainland market had been beta-driven with low dispersion in the past, resulting in more flows into passive management, but in recent months, in part due to uncertainties caused by Covid-19, the dispersion is higher, creating a conducive environment for active managers to unlock value by being selective.

Passive investors track markets by holding portfolios that mirror indices while active investors aim to identify opportunities to outperform a market or index. Separately, dispersion measures the degree to which the components of a market index are correlated, and generally, the greater the dispersion, the riskier an investment.

Tung also noted that fees for passive China equity options, such as ETF products, are not cheap, which makes active investing more attractive. “The big [beta-to-alpha] shift has become more noticeable in 2020,” he stressed.

Indeed, active managers of China A-shares tend to deliver higher-alpha return compared with those investing in emerging markets’ equities. According to the eVestments data (see table below), the median emerging-market manager‘s alpha is notably lower than China A-shares’ median alpha as of September this year.

Ori Ben-Akiva, director of portfolio management at Man Numeric, told AsianInvestor that active managers have the advantage of flexibility, in that they can capture market inefficiency while being mindful of risk management and execution. Active investing can provide bespoke investment solutions to suit specific investment objectives, he said.

“The breadth of China’s A-share market, with around 4,000 stocks, makes it a fertile ground for systematic managers to generate returns through the ‘law of large numbers,’ Ben-Akiva added.

Ori Ben-Akiva,
Man Numeric


Another appealing aspect of investing in China shares is the economy’s shift from the old economy to a new economy. Tung at GSAM said that as the country undergoes massive economic transformations combined with rapid technological innovations, investors will continue to see changes in the opportunity set going forward. This development would be a basis for investors to go more active, he said.

Additionally, GSAM projected that China’s economy in 2021 would expand by 10.5%, higher than the IMF’s 8.2% prediction in October. The fund manager also sees a broadening of growth, benefitting an increasing number of sectors and regions. Other asset managers are also bullish on China. (see table below).

On stock selection, Wu Yibing, head of China at Temasek Holdings, which manages S$306 billion ($229 billion) of assets, told AsianInvestor in an email that the sovereign wealth fund would focus on sectors that are driven by domestic consumption and innovation as well as service-focused companies.


Despite investors’ more robust appetite for China equities, they remain concerned about regulatory and volatility risks. Wu was one of them. He said that Temasek would continue to be cautious about the risks that result from geopolitical tensions.

“Volatility is relatively higher than developed markets, and there is a lack of risk management tools, particularly offshore index futures and options; the lack of short selling negatively impacts the price discovery process, and capital controls remain in place,” said Ben-Akiva.

Tung has similar views. “We recognise that volatility is a big concern,” he said. GSAM aimed to have better risk-adjusted returns by taking a bottom-up approach in stock selection, focusing on high-quality names with good corporate governance.

Regulatory risk also weighs on investors’ minds. The mega listing of Alibaba-backed Ant Group, one of the largest fintech players globally, was halted overnight by the regulator due to concerns that it may not have met listing and disclosure requirements.

China’s State Administration of Market Regulation said in a statement on December 14 that it has fined three tech companies Rmb500,000 ($76,000) each for their failure to report past deals following checks under a 2008 anti-trust law. These companies included Alibaba and Tencent-backed China Literature, a digital reading platform.

Most fund houses are bullish about the outlook for China equities

Allianz Global Investors

Cautious on China’s investment outlook in the near term, given that fiscal and monetary policy are on a path of being normalised against an improving macroeconomic backdrop.

Amundi Asset Management

In the near term, non-US stocks may benefit from the tailwinds of improving growth, led by China and the US by the diminishing intensity of the pandemic, and by a rotation from growth to cyclical stocks.


Overweight Asia ex-Japan equities. Many Asian countries have effectively contained the virus and are further ahead in the economic restart. The region’s tech-orientation allowing it to benefit from structural growth trends.

Credit Suisse

The increasing institutionalisation of the A-share market is a once-in-a-lifetime opportunity for investors.

Eastspring Investments

Rising political tension between the US as the old established global power and China as the challenger is set to continue. Investors will need to think harder about a more bipolar world with perhaps two main currencies, trading systems and technologies.

JP Morgan Asset Management

An acceleration in global trade growth can boost overall earnings performance in Asia and cyclical improvements can strengthen the investment case for Asian equities.

Pictet Asset Management

Chinese stocks should be among the leaders in 2021.

State Street Global Advisors

Earnings growth in China to be especially resilient, and Chinese growth and consumer stocks most appealing.

T. Rowe Price

Asian markets offer attractive risk-reward relative to their global counterparts from a valuation perspective. However, we would caution investors not to expect broad-based re-rating in 2021 unless the global liquidity environment becomes even more plentiful.


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