China A-shares: Doors open to vast stock picker’s market

Key takeaways

• China’s stock market is being rapidly integrated into global financial markets and will present investors with both significant opportunities and challenges.
• The depth and breadth of the A-share universe is improving from industrials companies to technology and consumer-oriented firms.
• Stock selection is key since the quality of companies varies significantly and the equity market is less mature.

China’s economy has grown rapidly to become the world’s second-largest after the U.S. And its stock market is not far behind.

The country’s stock market capitalization is a whopping $9 trillion in U.S. dollar terms. But a large part of it is not included in global financial markets. That’s changing, and China could well be on its way to becoming a market that investors may not be able to ignore anymore.

Chinese equities already dominate emerging markets indices and MSCI, which runs the most well-known international and global indices, bolstered their presence by adding more than 230 companies from mainland China, known as A-shares, to its benchmark emerging markets index in June and August of this year.

MSCI and other index providers are likely to continue expanding representation of China’s market in these broader indexes even if the country’s economy slows.

“It’s a large hunting ground, and we’ve devoted considerable resources to understanding it,” says portfolio manager Steve Watson. “Capital Group began studying the A-share market in 2002 and made our first investments in 2009. Our team in Beijing is analyzing these companies in a systematic way that will be of immense value to our decision-making process.”

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