European institutions stand by Chinese equities despite volatility
Institutional investors including Ilmarinen and AP2 are standing by their Chinese equity holdings despite ongoing and pronounced market turbulence, which last week led the local regulator to intervene in the market.
The China Securities Regulatory Commission (CSRC) last week prohibited any shareholder owning more than 5% of a locally listed company from selling down its shares for six months.
The move was a reaction to volatility that saw two Chinese exchanges fall by 10% on opening, triggering their suspension.
Finnish pensions mutual Ilmarinen, which has allocated more than 5% of its equity portfolio to Chinese equities, declined to speculate on how the volatility might affect its holdings.
Anna Hyrske, a Hong Kong-based equity portfolio manager at Ilmarinen, told IPE the limitations imposed by the CSRC were “not favourable steps in opening up the markets”.
But she noted that the ban on selling shares would have little effect on Ilmarinen, due to the size of its investments in the region.
“China is one of the largest markets in the world, and its inclusion in the main indices is more a question of when rather than if,” she said.
“Therefore, it is important we keep an eye on the market and learn more how it behaves, how it moves – what the triggers are affecting this market.”
Index provider MSCI in 2013 warned investors to prepare for the eventual inclusion of China into its indices.
In May, rival provider FTSE announced it would be including Chinese A shares in two emerging market indices, gradually increasing the exposure from 5% to 32% of each index.
Hyrske said the recent volatility, although remarkable for its speed, was perhaps understandable.
“The Chinese stocks have had a massive rally in the past year,” she said.
“It is natural that, after such a rally, there will be some price adjustments. The speed and scale is just something that caught everybody off guard.”
For its part, Swedish buffer fund AP2, which in February said it would allocate a further $200m (€175.5m) to Chinese equities after its holdings in the region returned 59%, also stood by its investments.
A spokeswoman stressed that the SEK240bn (€25.2bn) fund’s interest in Chinese equity was for the long haul.
“When making our allocation decision, we have been well aware of the short-term volatility it could entail and have scaled our exposure appropriately,” she said.
“Since entering the market, our returns, including the recent turmoil, have been very good.”
Hyrske added that Ilmarinen would monitor any future market changes and focus on large-cap companies with sufficient liquidity – particularly ones offering greater transparency.
“Certain sectors,” she said, “offer interesting opportunities with attractive valuations, especially consumer-related sectors in the ‘new economy’.”
Meanwhile, APG, asset manager for Dutch civil service pension fund ABP, pointed out that the largest problems – high volatility and the suspension of stock market quotations – had occurred chiefly at the Shanghai and Shenzhen exchanges.
A spokesman said: “We are not active in listed A-shares over there for our clients, as these local exchanges and this local legislation are still in their infancy.
“APG has been investing in China for years through H-shares on Hong Kong’s stock exchange. However, these seem to be less affected than specific A-shares, and this portfolio has not been subject to listing suspensions.”