Investment Insights
January 27 2022

China A Market Remains Appealing Despite Recent Headlines

10 min read

Public Equities Team 

In recent months, many investors have been nervous about the future of the Chinese economy and investment landscape. And you can't blame them, given the series of headlines that have grabbed the world's attention. The headlines have included the regulatory crackdown in certain sectors, the common prosperity directive, which aims to narrow the country's wealth gap, carbon neutrality plans, and the dual circulation economic strategy, which aims to bolster domestic demand in addition to focusing on exports.

These developments are undoubtedly increasing competition, raising operating and compliance costs, and introducing uncertainty for many companies - especially in industries like real estate, education, gaming, internet, media and e-commerce. Economic growth is expected to face downward pressure as well. However, the Chinese government's priorities over the next 5 to 10 years are creating fertile ground for many other companies.

This means that institutional investors can find attractive opportunities on the so-called China A market, which is comprised of companies based in mainland China and is the second largest stock market behind the U.S. by market capitalization.

This is the argument of a recent in-depth article published by TD Asset Management Inc. for its institutional clients.

There are many quality companies on the A-share market that are well positioned to take advantage of China's secular growth drivers, according to the article. These companies are under-represented in many global equity benchmarks or global emerging market portfolios.

Promising sectors

The article notes that consumer companies which belong to China's National Champions group are among the businesses which can provide opportunities for institutional investors. National Champions are home-grown private companies with strong national brands and products that have cultural appeal to Chinese consumers. Another area of promise, according to the article, are Chinese companies involved in the production of renewable energy, electric vehicles and the electric vehicle supply chain, aluminum, glass and building materials.

Low foreign ownership

Foreign ownership on the China A market is low, despite the size of that market. This presents significant potential for international capital inflow in the long run, the article notes. The China A market is also dominated by retail investors, which provides a great opportunity for institutional investors looking to access the space.

For more detail, read the full article.