The firm does not invest in A-shares, but it has funds invested in Hong Kong-listed H-shares, according to Danes.
That could change depending on next month’s MSCI decision about whether to include A-shares in their emerging market and Greater China indices. Inclusion is expected to result in greater foreign capital inflows into the mainland stock market.
A positive decision by the MSCI would encourge the firm to invest in A-shares, he said.
Initially, capital inflows would not be large because the MSCI is talking about partially including A-shares. However, it wold be a very important signal, he told FSA.
“If it’s fully included some point in the future, China will completely dominate the emerging markets benchmark.”
A-shares overpriced
Danes said valuations of A-shares are stretched compared to H-shares, their Hong Kong-listed counterparts.
“A-shares are much much more expensive. If H-shares represent what international investors place on the value of those Chinese sectors, then I can buy H-shares at one price, but I can only buy A-shares for a 30-50% premium,” he said.
Other analysts have also cited the valuation gap between A- and H-shares. Credit Suisse said the median price-to-earnings for Shenzhen small-cap stocks is currently at 82 times, while that for the Hong Kong Hang Seng’s small caps is only 15 times.
The other challenge is that the A-share market is very retail-focused and company disclosure is not at a level that most institutional investors would expect. In addition, the average holding period could also be a problem for institutional investors, he said.
The investment horizon for A-shares is extremely short. “Both individuals and institutions [in China] tend to look at A-shares only over the next couple of quarters, while we take a three-to-five year view on our investments.
“If you invest on a six-to-eight week horizon, you probably don’t need to worry too much about corporate governance of the company. But if you invest for three-to-five years, you have to take things very seriously,” he added.
Martin Currie, is one of the nine affiliates of Legg Mason. It has assets under management in Asia of around $3.5bn, according to Danes.
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While Martin Currie currently does not have exposure to A-shares, the firm’s Greater China fund has several China investments in its top ten holdings via H-shares. Below is the performance of the fund versus its benchmark MSCI Golden Dragon index over the past three years, according to FE Analytics data.
