With Shanghai-Hong Kong Stock Connect, China recently opened its huge domestic capital markets to international investors. The program allows foreign investors to purchase shares of Shanghai-listed companies on the Hong Kong Exchange.
For the first time, foreign investors can invest in Chinese businesses that are only listed domestically without going through the painstaking Qualified Foreign Institutional Investor (QFII) quota system.
As true global investors, the Trimark team aims to turn over every possible stone in order to locate the best investment opportunities for our clients. With this in mind, I have embarked on an extended research trip to China. I arrived early this year and I’ll be working out of the Invesco China office in Shenzhen until the end of February.
I’ve been getting my bearings – experiencing local living, talking to my colleagues and meeting with high-profile fund managers and analysts from local brokerages.
Here are my initial observations about equity investing in China.
Even though I worked in the investment industry in China for nearly six years before moving to Canada, the difference between the average equity investor’s outlook here and our long-term thinking at Trimark is still mind-blowing. In my view, these differences create amazing opportunities for us to invest in businesses largely ignored by local investors.
Many equity investors in China have very short-term investment horizons and very high return expectations. Most retail investors are only interested in near-term performance and will switch funds within a few months.
Investors here generally have a much higher tolerance for volatility than their peers in Canada. People will casually swallow a 30% swing over a couple of weeks and talk about 20% annual returns, although few actually end up with such returns.
As a result of all of these factors, most fund managers only invest in securities which they believe can deliver strong absolute returns over a short timeframe, often less than one year. It’s been my experience that only those fund managers with a very loyal investor base (or those who manage their own money) can afford a three to five year time horizon – the time frame Trimark managers work with.
For the rest, surviving in this environment means chasing momentum, operating in regulatory “grey” areas.
I’ve asked every sell-side analyst I’ve met so far the same question: “Which companies under your coverage would you invest your own money in if you knew you’d have to stay invested for three to five years?” Every analyst, bar none, paused. Most told me they’d never heard – or thought about – this question. Some even laughed out loud – “What a “nonsense” question!” This is astounding for a long-term investor like me.
For us at Trimark, this mindset creates excellent opportunities to invest in Chinese businesses that locals ignore because near-term returns are deemed to be lacking, while in some cases the rewards may be lucrative for investors over the longer term.
If you have any comments or questions about the work I’m doing in China, please leave them below.
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