China’s mainland stock market has been on tear for the past year as local Chinese investors buy into a government-led reform agenda that shows promise for both the economy and the society. That upward momentum is now igniting Hong Kong-listed and U.S.-listed Chinese stocks, as foreign investors begin to recognize a budding change in sentiment about China’s economic future, Brendan Ahern, CEO of KraneShares, told ETF.com.
According to Ahern, there’s plenty to like about China, not least the country’s efforts to open up access to its market. Jump right in is his main message to U.S. investors: “More China is coming.”
ETF.com: Chinese equities have been staging an impressive rally recently. What’s driving that? Is it hinged on ideas of QE?
Brendan Ahern: It all starts with the reform-minded leadership that was appointed two years ago. In our view, they have “walked the walk” and “talked the talk.” The leaders are implementing a reform agenda that helps the economy and the society, and that’s being recognized. They want state-owned enterprises to be more efficient; they are allowing private investors in; they are spinning off noncore businesses; there’s been a lot of M&A activity.
The onshore Chinese market was the best-performing stock market globally in the past year, up something like 90 percent, and that’s mainly “consumed” by investors in China because foreigners have limited access. That tells us that Chinese investors have recognized how the reform agenda can benefit the stock market, but you also have to consider that they don’t have that many other investment options.
They could invest in a money market fund, but that yields about 5 percent in China. They could put money into housing, but prices have flattened out. They could put it into wealth management products, but those don’t look as guaranteed as they were in the past, or they could put it into gold, but that’s done poorly.
Ultimately, the momentum in the onshore market is driven by Chinese investors who recognize the reform agenda, and find that the stock market looks good relative to other investment alternatives.
ETF.com: I’ve heard the statistic that the onshore market comprises about 70 percent small investors. If that’s right, this rally is not being driven by large institutions at all. Should U.S. investors see it as more of a speculative run?
Ahern: It’s closer to 80 percent small individual investors. Mutual funds, and pensions in China represent about 15-plus percent, and 2 to 3 percent is foreign investors.
The fact is that institutions are a smaller part of capital markets in China than in the U.S. But access is changing. Think about the Stock Connect program. In June, for instance, MSCI will announce whether the onshore market gets included in broader indices. As a U.S. investor, you can wait or you can begin to access China’s onshore market now because more China is coming. The door is opening.
Now, the market is up nearly 100 percent, but it’s still 18 percent below all-time highs, and P/E is just over 20 right now, so you could argue that we are far from a speculative bubble stage. There’ll be corrections, but we are positive on this market.