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The asset manager for a changing world CHINA A-SHARES: TAP INTO BROADER INVESTMENT OPPORTUNITIES AS CHINESE MARKETS OPEN UP

The asset manager for a changing world CHINA A-SHARES: TAP INTO BROADER INVESTMENT OPPORTUNITIES AS CHINESE MARKETS OPEN UP
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  The asset manager for a changingworld Q4 2019 For professional investors CHINA A-SHARES: TAP INTO BROADER INVESTMENT OPPORTUNITIES AS CHINESE MARKETS OPEN UP  CHINA A-SHARES: TAP INTO BROADER INVESTMENT OPPORTUNITIES AS CHINESE MARKETS OPEN UP -2- SUMMARY Chinese equity markets have lagged behind the spectacular growth of the economy. There remains a large discrepancy between China’s share of the global economy and that of investors’ equity allocations. We believe it inevitable that this margin will close as China continues to open up its capital markets to foreign investment.In recent years, China A-shares have undergone a very rapid transformation. 1. The A-share market is one of the largest equity markets in the world, with a market capitalisation of approximately USD 8 trillion 1 .2. China’s government is pushing to liberalise the economy and shift it towards consumption-led growth and A-shares reflect the emergence of responsive private sector companies eager to serve the needs to domestic consumers. This should put Chinese equity markets in a more favourable position.3. The decision by MSCI and FTSE to include some China onshore companies in their indices is a significant milestone in the mainstream acceptance of Chinese equities in international investors’ portfolios. In our view, this will help improve the investor structure of the China A-shares market from being retail-focused to a more balanced mix of institutional and retail investors.4. Ample liquidity and their low correlation with other markets mean that A-shares offer a useful option for foreign investors to diversify their portfolios. Despite slowing growth and external volatilities, the corporate earnings outlook in China remains healthy, in our view.5. Further opening up of capital markets will improve the sophistication and efficiency of China’s equity markets, which should add to their attractiveness for global investors. Investing in this market involves a number of risks such as: liquidity risks, a volatile trading environment, stock suspensions and slowing economic growth. However, these risks are comparable to those in other emerging markets. While risks related to the nature of the market and its investor base should not be overlooked, they could be exploited as they could lead to volatility and mispricing that may result in an attractive opportunity to generate alpha.BNP Paribas Asset Management (BNPP AM) believes there is a profound investment opportunity in China’s equity market driven by: 1) The gradual acceptance of Chinese equities in institutional investors’ portfolios; and 2) The changing nature of China’s economic structure, prompting the emergence of Chinese companies becoming recognised on the global stage. The opportunities in China A-shares today are too big to ignore, but the Chinese equity market requires local expertise to navigate its waters successfully. We believe the best way for an equity investor to gain exposure to the modernisation of China’s economy is to take a long-term investment view on a number of Chinese stocks which we anticipate should be future winners in their industries. While a purely passive approach has limitations, we believe that active exposure to the China A-share market could benefit an investor’s portfolio over the long term, by enhancing the risk-return profiles of their portfolios. CONTENTS SUMMARY ..................................................... 2 BY THE NUMBERS ....................................... 3 THE SEVEN WONDERS OF CHINA A-SHARES - WHY INVEST IN CHINESE EQUITIES ................................ 4 HOW TO ACCESS CHINA A-SHARES MARKETS .................................................... 12 MSCI TO ADD MORE A-SHARES: A BOON FOR FOREIGN INVESTORS ....... 16 WHERE ARE THE RISKS? ......................... 19 CHINA IS BECOMING SERIOUS ABOUT ESG ............................... 20 CONCLUSION ............................................. 22 1 Source: BNPP AM, Bloomberg, as of 31 March 2019.  CHINA A-SHARES: TAP INTO BROADER INVESTMENT OPPORTUNITIES AS CHINESE MARKETS OPEN UP -3- Sichuan82.6 M  =  Germany82.3 MExample Australia UruguayLibya YemenBulgaria PolandGermany Saudi Arabia MoroccoKenya Colombia UnitedKingdom Argentina  AfghanistanPhilippinesMontenegro Jamaica Costa Rica  Austria South Africa Romania Croatia FranceSouth Korea EgyptCanada ThailandVietnamTurkeySpainGhana LuxembourgDenmark NetherlandsIraqSlovakia CzechRepublicFinland Sweden Norway CHINA POPULATION COMPARISON MAP 2 Source: China Internet Network Information Center, January 2017.3 Source: CLSA, March 2017. 4 Source: China National Bureau of Statistics, UN Department of Economic and Social Affairs. Note: Based on 2016 populations. BY THE NUMBERS     One-in-six humans on Earth live in China. The economies of China’s megaregions match the size of some major national econo-mies 4 . For example, the population of Sichuan is equivalent to Germa-ny’s (~82 million). YOU  KNOW? DID Here is a snapshotof some key indicators 1.38 BILLION China has the largest population in the world.Market capitalisation of the A-shares market (traded on two exchanges in Shanghai and Shenzhen). USD 8 TRILLION Included in MSCI indices (Nov. 2019). 421 A-SHARES   Foreign ownership of the A-shares market. 2.7% Mainland Chinese consumers in the global luxury market in 2016. 3 30% At 100% inclusion, China A-shares are expected to make up 14.8% of the MSCI Emerging Markets Index (MSCI EM). 14.8% After reaching a 20% inclusion factor, A-shares will make up 3.33% of the MSCI EM. 3.33% Internet penetration rate in 2016 (vs. 10.5% in 2006 2 ). 53.2% Retail investors account for about 86% of total trading volume in the China A-shares market (vs. 35% in Hong Kong). 86% China’s GDP growth in 2018 (vs. 6.8%  year-on-year [YoY] in 2017). 6.6%  CHINA A-SHARES: TAP INTO BROADER INVESTMENT OPPORTUNITIES AS CHINESE MARKETS OPEN UP -4- The Seven Wonders Of Chinese EquitiesAmong the largest equity marketsComplementary markets Low correlationUnderexplored marketMore inclusion of A-shares in major indicesAttractive valuationsChina’s growth path 5 International Monetary Fund.6 According to the “World Economic Situation and Prospects 2018” released by the United Nations in January 2019. THE SEVEN WONDERS OF CHINA  A-SHARES: WHY INVEST IN CHINESE EQUITIES As the China onshore equity market opens up to foreign investors and the MSCI inclusion of A-shares accelerates, large amounts of capital are expected to flow into the Chinese equity markets over the long term. In addition to a tactical investment in China A-shares, we believe there are strong strategic reasons for regarding it as a long-term investment proposition: There is every prospect of China continuing its impressive growth path with powerful domestic tailwinds, such as urbanisation and a growing middle class, and much scope for the country to boost its per capita GDP and productivity. China’s GDP growth was 6.6% in 2018. Although this is the lowest since 1990 and China’s economic engine is cooling down, it continues to rack up one of the world’s fastest rates of economic growth.“The IMF 5  predicts that if current trends continue, China would overtake the US as the world’s largest economy (in nominal USD REASON #1 UNTAPPED OPPORTUNITY IN CHINA’S GROWTH PATH terms) by 2030”, according to Chi Lo, BNPP AM’s senior economist dedicated to China. In recent years, “China’s growth has contributed about a third of global growth and its contribution is expected to rise to 35% in 2019 and 2020, according to the UN 6 ”. The major change from the past is that the Chinese government is focused more on high quality, stable growth rather than on achieving the fastest growth possible.China’s middle-aged population has benefited from a long run of wealth accumulation and real income growth which has been extremely supportive for domestic consumption growth in China.  CHINA A-SHARES: TAP INTO BROADER INVESTMENT OPPORTUNITIES AS CHINESE MARKETS OPEN UP -5- 2005 20092007 2011 2013 2015 2017 2019 2021 2023 20312025 2027 2029 2033 2035 020406080100120    M   i   l   l   i  o  n   P  e  r  s  o  n  s China  JapanUK US 10.7%2.2%0.4%China World US Middle-aged people (40-64) with household income of more than USD 50 000China has significant real income growth vs. the US and the World (year-over-year, 2001-2015) Source: HSBC, Global Demographics, as of May 2018.Source: HSBC, Global Demographics, as of May 2018. Despite its economic contribution in a global context, Chinese equities appear to be under-represented in global indices, as shown in the following chart. Chinese equity markets have lagged behind the spectacular growth of the economy CHINA OFFSHORECHINA ONSHORE 15.0%11.5%10.9% 11.0%20.8%11.5%3.7%2.6%0.1% 0%5%10%15%20%25%GDP (2017)Total trade(2017)RMB weight in SDR (reviewed in Oct 2017)Consumption(2017)A-sharesturnover as % of the world (2018)A-shares market cap as % of the world (Nov 2018)China % in MSCI AC World (Jan 25. 2019) Foreign ownership inA shares (Sep 2018)A-shares % in MSCI AC World (Jan 25. 2019) MARKETMACRO China as % of the world economy Source: FactSet, MSCI, BNPP AM, Goldman Sachs Global Investment Research, as of 8 February 2019.
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