By Christopher Vass, Senior Product Manager, APAC
Although China’s capital markets have struggled in recent months on the back of a declining RMB and trade war jitters, the bulls have not disappeared completely. The FTSE China A Index delivered its strongest performance since June in the first week of September, closing up 4.05 percent – which China’s regulators capitalised on by declaring a reserve ratio cut after the market closed on September 6.
As Q3 draws to a close, one segment of China’s markets deserving of more commentary and analysis is China’s mid-cap segment. Since mid-2016, China’s mid-cap A-Shares have underperformed large-cap A-Shares – which largely consist of China’s well-known state-owned enterprises (SOEs).
In fact, the gap between large-cap A-Shares and mid-cap A-Shares has widened in recent months, with some analysts claiming that an uncertain outlook is putting a damper on appetite for China’s smaller and lesser known companies. Put another way: in turbulent times, investors are predictably favouring so-called ‘safe’ trades.
The data bears this out: In 2018, Chinese large-caps outperformed small and mid-caps for the first time in 10 years, suggesting to some analysts that China investors are “running out of ideas” and are clinging to “easy targets.”
In terms of their total return, the FTSE China A Mid Cap constituents have returned to 2014 levels, as illustrated by the chart below. While that may be disappointing to those investors looking for the peaks of 2015, some analysts suggest the time could be ripe for more investor interest in mid-caps, as they haven’t returned to previous highs.
Agents of China’s ‘new economy’
Unlike many of the SOEs, many China mid-caps are champions not of China’s economic past, but its future – broadly defined as an increasingly ‘tech-focused’ economy driven by innovation and domestic consumption. This contrasts with China’s corporate giants, which fuelled the country’s historic macroeconomic growth in recent decades in areas such as banking and natural resources.
Case in point: When the China onshore equity market surged in March on the back of monetary easing and optimism that the trade war was nearing a resolution, it was China’s mid-caps (especially telecoms) that dominated the rally. For one specific example, shares in Eastern Communications surged 752 percent between late November 2018 and mid-March 2019, due to market speculation that the firm is set to benefit from China’s 5G plans.
The technology sector is heavily featured in China’s mid-cap segment. In fact, China’s technology companies are now assigned higher weightage in the mid-cap segment compared to large-caps, as per the Industry Classification Benchmark (ICB) Supersector Breakdown.
Similarly, Chinese mid-caps in other sectors that can be classified as ‘new economy’ such as retail, healthcare and personal and household goods are also now assigned higher weightage in the mid-caps category.
And if that’s not enough to warrant more attention to mid-caps, on September 10th the State Administration of Foreign Exchange announced that it plans to scrap foreign investment limits under the Qualified Foreign Institutional Investors (QFII) and Renminbi Qualified Foreign Institutional Investor (RQFII) schemes, ending a decades-long policy, and potentially unleashing more foreign investment into A-Shares.
The news bodes well for investors interested in China’s mid-caps, which are at the vanguard of China’s ‘new economy,’ and will likely play a vital role the country’s overall development in the decade ahead.
© 2019 London Stock Exchange Group plc and its applicable group undertakings (the “LSE Group”). The LSE Group includes (1) FTSE International Limited (“FTSE”), (2) Frank Russell Company (“Russell”), (3) FTSE Global Debt Capital Markets Inc. and FTSE Global Debt Capital Markets Limited (together, “FTSE Canada”), (4) MTSNext Limited (“MTSNext”), (5) Mergent, Inc. (“Mergent”), (6) FTSE Fixed Income LLC (“FTSE FI”) and (7) The Yield Book Inc (“YB”). All rights reserved.
FTSE Russell® is a trading name of FTSE, Russell, FTSE Canada, MTSNext, Mergent, FTSE FI, YB. “FTSE®”, “Russell®”, “FTSE Russell®”, “MTS®”, “FTSE4Good®”, “ICB®”, “Mergent®”, “The Yield Book®” and all other trademarks and service marks used herein (whether registered or unregistered) are trademarks and/or service marks owned or licensed by the applicable member of the LSE Group or their respective licensors and are owned, or used under licence, by FTSE, Russell, MTSNext, FTSE Canada, Mergent, FTSE FI, YB. FTSE International Limited is authorised and regulated by the Financial Conduct Authority as a benchmark administrator.
All information is provided for information purposes only. All information and data contained in this publication is obtained by the LSE Group, from sources believed by it to be accurate and reliable. Because of the possibility of human and mechanical error as well as other factors, however, such information and data is provided "as is" without warranty of any kind. No member of the LSE Group nor their respective directors, officers, employees, partners or licensors make any claim, prediction, warranty or representation whatsoever, expressly or impliedly, either as to the accuracy, timeliness, completeness, merchantability of any information or of results to be obtained from the use of FTSE Russell indexes or research or the fitness or suitability of the FTSE Russell indexes or research for any particular purpose to which they might be put. Any representation of historical data accessible through FTSE Russell indexes or research is provided for information purposes only and is not a reliable indicator of future performance.
No responsibility or liability can be accepted by any member of the LSE Group nor their respective directors, officers, employees, partners or licensors for (a) any loss or damage in whole or in part caused by, resulting from, or relating to any error (negligent or otherwise) or other circumstance involved in procuring, collecting, compiling, interpreting, analysing, editing, transcribing, transmitting, communicating or delivering any such information or data or from use of this blog or links to this blog or (b) any direct, indirect, special, consequential or incidental damages whatsoever, even if any member of the LSE Group is advised in advance of the possibility of such damages, resulting from the use of, or inability to use, such information.
No member of the LSE Group nor their respective directors, officers, employees, partners or licensors provide investment advice and nothing contained in this blog or accessible through FTSE Russell indexes or research, including statistical data and industry reports, should be taken as constituting financial or investment advice or a financial promotion.
Past performance is no guarantee of future results. Charts and graphs are provided for illustrative purposes only. Index returns shown may not represent the results of the actual trading of investable assets. Certain returns shown may reflect back-tested performance. All performance presented prior to the index inception date is back-tested performance. Back-tested performance is not actual performance, but is hypothetical. The back-test calculations are based on the same methodology that was in effect when the index was officially launched. However, back- tested data may reflect the application of the index methodology with the benefit of hindsight, and the historic calculations of an index may change from month to month based on revisions to the underlying economic data used in the calculation of the index.
This publication may contain forward-looking assessments. These are based upon a number of assumptions concerning future conditions that ultimately may prove to be inaccurate. Such forward-looking assessments are subject to risks and uncertainties and may be affected by various factors that may cause actual results to differ materially. No member of the LSE Group nor their licensors assume any duty to and do not undertake to update forward-looking assessments.
No part of this information may be reproduced, stored in a retrieval system or transmitted in any form or by any means, electronic, mechanical, photocopying, recording or otherwise, without prior written permission of the applicable member of the LSE Group. Use and distribution of the LSE Group data requires a licence from FTSE, Russell, FTSE Canada, MTSNext, Mergent, FTSE FI, YB, and/or their respective licensors.