The Chinese civilization may go back 4,000 years, but its stock market is younger than many millennials, panelists reminded the audience at a session focusing on investment in China at the Morningstar ETF Conference in Chicago.
“It’s important to keep in mind that China’s a relatively new capital market,” said Dodd Kittsley, head of ETF strategy in the Americas for Deutsche Asset and Wealth Management. “[It’s internal stock markets] didn’t even exist until 1990, and investors were not able to margin or short until 2010.” Margin was a big part of the recent stock market collapse, he added.
Commentators have blamed this youth for the volatility of China’s stock market since June. The Shanghai Stock Exchange Composite Index ran up 118% from October 2014 to June, when it fell 44% through September, leading to government intervention in the stock and currency markets as well as regulatory changes, which may have exacerbated the fall.
Brendan Ahern, CIO of KraneShares, said that the market’s ride up didn’t have anything to do with economic fundamentals, noting that during the stock rally, “the entire time there was a deceleration across the economy, not just on investment side, but on consumption side as well. It really was divorced from the economic fundamentals.”
Despite this, both Kittsley and Ahern were bullish on China. Ahern noted domestic consumption was strong now, with sales reports showing more than 10% growth in June, July and August. Kittsley agreed, using a hockey metaphor: “China is where the puck is going … It’s just too big to ignore.”
Both saw positives, from changes in market indexes to reflect a better mix of Chinese business and industry (“Now the MSCI China is very geared to old China,” Ahern said).
“The biggest [point] to deliver here is the different flavors of China,” Kittsley noted. “To paint China with one brushstroke is short-sighted and you lose opportunity China has to offer.” He pointed out one huge growth potential: only 3% of A-shares in the stock market are owned by investors outside of China. That will change as the market continues to mature and open, he said.
Less ebullient on China, especially in the short term, was panelist Dan Rohr, director of basic materials equity research for Morningstar.