06/03/15   A-Shares, Coming To A Portfolio Near You

Editor’s Corner

Ron Rowland

China has come a long way in a short time in the investment world.  The first ETF that attempted to give investors exposure to the country was iShares MSCI Hong Kong (EWH).  Launched in March of 1996, this ETF came to market when Hong Kong was still considered a territory of Great Britain. It took another eight years before the first ETFs containing the word “China” arrived on the scene.  The iShares China Large Cap (FXI) was rolled out in October 2004 and PowerShares Golden Dragon China (PGJ) was listed two months later.  The world would have to wait until 2007 for another China ETF.

There are a few China ETF milestones worth noting:  ProShares made it possible to bet against Chinese stocks in 2007; Market Vectors was the first with a currency fund in 2008; Global X launched the first China sector funds in 2009; Market Vectors gave ETF investors their first taste of A-shares in 2010; Guggenheim introduced investors to Chinese bonds in 2011; and WisdomTree rolled out a China dividend ETF in 2012.

Today, there are more than 40 China ETFs, plus another half-dozen that have already closed down and gone out of business.  Additionally, there are many other multi-country funds with large exposures to China.  China is now a significant portion of global equity allocations, and it is about to get bigger – much bigger.

Chinese A-shares, which are stocks of mainland companies traded in Shanghai and Shenzhen, have historically been off limits to all but local residents.  That has gradually changed since the arrival of the Market Vectors ChinaAMC A-Share ETF (PEK) in 2010.  The trend accelerated recently with a new linkage to Hong Kong, and now there are seven A-share ETFs for investors to choose from.

However, the big news is coming from index providers. FTSE recently announced plans to begin including China A-shares in its emerging markets benchmark index.  When complete, this will take the China allocation from 29% to more than 50%.  Next week, MSCI is set to decide if it will include A-shares in its MSCI Emerging Markets Index, where China currently holds a 25% weighting.  With emerging market equities representing $1.7 trillion in assets, a near doubling of China’s allocation will likely create significant market disruptions unless the change is gradually scaled in.  These changes are also likely to spur the introduction of a new class of funds targeting emerging markets excluding China, giving investors the tools needed to better manage their China exposure.

Investor Heat Map: 6/03/15

Sectors

The US stock market has been bumping up against new highs for the past three months.  There have been some small breakouts, but none of them have been significant or sustained.  Action within many of the sector categories has been mimicking the broader market, and they too have been unable to mount a rally.  Health Care is a prime example.  Although it remains at the top of the sector rankings, it is essentially at the same level it was in mid-March.  The relative strength across the sector categories is nearly the same as a week ago, although most are displaying a loss of momentum.  Technology was the only sector increasing momentum the past week, which helped it secure its second-place ranking.  Consumer Discretionary, Financials, and Materials round out the top-5 spots, which also happens to be the line of demarcation between positive and negative scores today.  Industrials and Consumer Staples went from green to slightly negative this past week, putting the majority of the sectors in the red for the first time since October.  Utilities and Energy swapped places, and they were the only two sector categories to do so this week.  Real Estate is on the bottom for a seventh week.

Styles

Most style categories confined their momentum changes to a tight range of -2 to +1 this past week.  There were two downside exceptions, with Mega-Cap and Mid-Cap Growth each losing 3 points.  On the upside, there was just one exception, but it was a doozy.  In a week of mostly boring action, Micro-Cap more than doubled its momentum score from 5 to 11 and jumped from tenth to second in the rankings.  Strength in Micro-Cap and weakness in Mega-Cap is typically a sign of aggressive and bullish market action since the Mega-Cap category is the home of the Blue Chip stalwarts and the relatively stable stocks investors prefer in times of uncertainty.  Our Micro-Cap benchmark only gained 1.8% over the past week and is just 4% above its low point of the past ten weeks.  Additionally, it is still about 2% below its April high.  These are not the typical stats of a category jumping eight places in the rankings, so the move may be a sign of boring market conditions rather than an emerging new bullish trend.

Global

China has been moving mostly sideways the past two months following its huge surge in late March and early April.  As such, its momentum is fading, and it no longer enjoys a large margin over the other categories.  Japan is second place for a third week and is now in a position to challenge China for the top.  EAFE climbed a spot to claim third place, and the US jumped three spots to fourth.  The improvements for EAFE and the US were not so much a sign of strength for them as it was weakness in UK and Europe.  The UK dropped three spots as it gave back all of its mid-May gains, and Europe slipped despite a strong showing for the Euro.  Pacific ex-Japan and Emerging Markets flipped over to negative momentum, putting four of the global categories in the red this week.  Canada remains in a downward trend, and Latin America’s weakness intensified.


Note:
The charts above depict both the relative strength and absolute strength of various market sectors, styles, and geographic locations on an intermediate-term basis. Each grouping is sorted (top to bottom) by relative strength. The magnitude of the displayed RSM value is a measure of absolute strength, which is our proprietary method of measuring and reporting the intermediate-term strength as an annualized value.

 


“The real challenge is around the preparation time global investors have.”

Rakesh Patel, head of cash equities for Asia at HSBC Holdings, on the subject of understanding the
companies and accounting systems needed to track an MSCI index containing China A-shares


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