Demand for China's onshore equity market will increase as foreign investors gain confidence about a strengthening of economic growth outlook, according to Christina Chung of Allianz Global Investors.
This year foreign investors have avoided the country's mainland markets, the Shanghai and Shenzhen stock exchanges, due to an overall bearish sentiment towards Chinese equities and a withdrawal from riskier assets. Non-mainland investors currently make up around 3% of the market.
Chung recently upped her exposure to the mainland stock exchanges as she aims to improve on her recent underperformance.
She believes demand for credits that allow foreign investors to invest in the onshore stock market under the Qualified Foreign Institutional Investor (QFII) programme is likely to surge.
'We increased our onshore exposure at the end of July in order to take advantage of the QFII available as I think we will see a new rush amongst foreign investors when the market picks up,' she told Citywire Global.
'When investor confidence returns to the market, we think we will see a sharp upwards trend in the A-shares [onshore shares] as here domestic investors act more homogeneously and have no where else to go.'
The Luxembourg-domiciled funds gain access to the onshore market through Chung's Hong Kong listed China fund alongside her QFII quota.
She admits, however, that the trade made in July to increase her onshore holding anticipated the recent market rise a little too early.
The €300 million Allianz China Equity fund lost 2.4% in the last three years while the MSCI Shong Hua index rose 10.3%. Over the same period the Allianz Hong Kong Equity returned 7.9% while its Citywire benchmark, FTSE MPF Hong Kong, rose 10.95%
Chinese stocks advance
The Shanghai stock exchange reached a three-month high this week following an announcement of economic reforms by the new leadership. A renowned think tank also predicted that China's growth should speed up again in 2013.
The domestic market, though more diversified due to its historic status as the primary market for companies to list shares on, is more volatile than the offshore index. According to Chung this translates in a difference in their recovery periods.
'I wouldn't increase the quota now further from where we are in the onshore market because I think the Asian market will need more time to recover than the offshore market,' said Chung.
'2013 will be good for both, and I think that though the A-share will rise more rapidly, the H-share [offshore] will lead the recovery.'
China still 'risk-on' investment
Both markets suffered losses last year and the Shanghai Composite CR continued to drop this year by as much as 13.1%.
Having outperformed the index over the last five years, both of Chung's Luxembourg-domiciled funds have underperformed benchmarks over the past three years.
This Chung attributes to a heavily risk off sentiment in global financial markets. Defensive stocks such as China Mobile, which makes up 11% of the index and which Chung has underweighted the entire period, outperformed the market due to a perception of their defensive positioning.