In China, shorting equities is not yet permitted so index futures turned out to be the next best alternative. Alpha strategies (such as CTAs) were the new target for profits. This again forced authorities to act, limiting daily allowable future orders from 100 to only 10, and eventually prompt markets to cool down while investors began looking for new opportunities.
While volatile and full of uncertainty, the Chinese market is never short of opportunities, with the current situation being a result of a raft of economic reforms and a fundamental slowdown in activity.
According to the statement accompanying the country’s 13th five-year plan, China aims to double its 2010 GDP and per capita income of both urban and rural residents by 2020, thus delivering a more balanced, inclusive and sustainable development.
Within those reforms, ‘new economy’ investment cases are emerging as key investment targets for long-term investors. Among others, compelling investment ideas are coming from national defence, aerospace, the new-energy motor sector, medical services, information, intelligence concepts, and technology, concepts are already quite mature in western countries yet still in China.
Short term volatility
Chinese equity markets are likely to be volatile in the short run but should gradually resume a normal trend thanks to the winners in the new economy. The lack of confidence amongst market participants on state-owned sectors makes the overall investment sentiment much more short-term.
Thematic and consumption-led investment cases are expected to dominate positive market movements. In the long term, while real estate prices are meant to remain high and bond yields to decrease, there is a compelling argument that equities, especially the undervalued ones in the fast-growing sectors, will continue to offer greater asset allocation advantages than other assets.
The situation prevailing in 2015 was negative for fundamental long-term investors and hurt investors’ confidence. This situation has brought the market towards an important drift between favoured strategic sectors and privately-owned businesses.
A period of ‘irrational exuberance’ can often represent the best entry point for contrarian and/or long term investors with an active approach in what remains a fertile field for the informed stock picker.
