Chinese equities and country-specific exchange traded funds may have more room to run as active fund managers shift from their underweight China exposure.
ETFs that track Chinese companies are among the best performers this year. Year-to-date, the iShares China Large-Cap ETF (NYSEArca: FXI), the largest China-related ETF that tracks Chinese companies listed on the Hong Kong stock exchange, rose 24.8% Similarly, other China H-shares ETFs have stregnthened, including the SPDR S&P China ETF (NYSEArca: GXC) up 23.6% and the iShares MSCI China ETF (NYSEArca: MCHI) 26.5% higher so far this year. [China H-Shares ETFs Get Their Moment in the Limelight]
The China H-shares-related ETFs are trying to catch up to the surge in China A-shares. For instance, the db X-trackers Harvest CSI 300 China A-Shares Fund (NYSEArca: ASHR) increased 30.7, Market Vectors ChinaAMC A-Share ETF (NYSEArca: PEK) rose 34.2% and KraneShares Bosera MSCI China A ETF (NYSEArca: KBA) gained 35.0% so far this year.
Chinese stocks could still outperform ahead as active managers begin shifting into the market.
“Funds of various mandates are underweight the market in a range of 140-600bp, and thus have marked benchmark stress and a need to raise exposure to China,” Goldman Sachs said in a note, according to CNBC. “If emerging market funds alone increase allocations in the largest underweight sectors in China to marketweight, inflows could be worth $26 billion.”
Active managers may be pressured to increase their positions in the Chinese markets after funds have underperformed their benchmarks for their worst performance since 2009, Goldman said. Specifically, only 20% of emerging market funds and 40% of Asia ex-Japan funds have outperformed their respectively benchmarks this year, compared to the 60% to 70% average over the past five years, due to many funds’ underweight China position.
“Underexposure has directly led to underperformance,” Goldman added, pointing out that China is the largest market in both the Asia ex-Japan and emerging market indices and made up half of the indices’ year-to-date performance.
The Chinese A-shares market could also see a boost down the line as Beijing petitions major indexers to include mainland shares into global benchmarks. A-shares remains on the watch lists of FTSE and MSCI for possible promotion to emerging markets territory. [A-Shares in an EM ETF Drives Meaningful Performance]
Chinese H-shares have been gaining momentum as efforts to connect the Hong Kong and Shenzhen exchanges help boost China stock returns. [China H-Shares ETFs Still Look Attractive]
Moreover, Chinese banks have been allocating more into their domestic markets, fueling the surge in equities this year. Banking institutions shifted over 8 trillion yuan, or $1.29 trillion, into stocks so far this year ended March, compared to 6.5 trillion yuan in 2014, according to Reorient Research.
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Max Chen contributed to this article.