Offshore investors have been the odd man out in China's domestic “A-shares” equity market for the past month or two, trimming their holdings as local retail investors were jumping in with both feet.
A measured rally that began there in July has shown hints of irrational exuberance recently, including:
- a 25% surge for December, following an 11% gain in November;
- margin trading balances that almost tripled in 2014 to top 1 trillion renminbi (US$161 billion); and
- some aggressive forecasts, such as Morgan Stanley's Dec. 5 call for gains of as much as 450% in 2015.
The recent spike in volatility — following years where the CSI 300 index of the largest companies listed in Shanghai and Shenzhen kept to a depressed range between 2,000 and 2,500 — has led to “a lot of profit-taking,” especially by offshore institutional investors, said Jack Wang, the head of sales for Hong Kong-based CSOP Asset Management.
Against the backdrop of a “liquidity-driven, retail-led bull market,” there were redemptions of US$4.9 billion in December from exchange-traded funds offering foreign investors exposure to China A shares, noted Wong Kok Hoi, founder and chief investment officer of Singapore-based APS Asset Management Pte. Ltd.
Even so, those managers, and others, predict a continued pickup in foreign allocations to China's quota-protected markets in Shanghai and Shenzhen for 2015, and a quantum leap should MSCI Inc. conclude the next annual review of its global index business in June by adding A shares to its emerging markets indexes — as many anticipate.
Ironically, the market's 63% surge to close the year at 3,533.70 came as a spate of sober economic data showed China's world-beating economic growth continuing to come off the boil — prompting retail investors to divert money invested in property or commodities to stocks, said Chen Li, Shanghai-based strategist for Greater China equities with UBS Global Asset Management.