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China’s A-share market: From volatility to maturity

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In an interview with Euromoney, Shi Bo, general manager and CIO (equity) of Southern Asset Management, warns of lower short-term stock market returns ahead, but sees plenty of opportunity for growth in investment advisory.

Since February 2021, China's A-share market has become more volatile following a strong performance last year. The cooling of investor sentiment has also significantly slowed the issuance of new products from China's mutual funds. Even so, China's growing fund industry has become an extremely important investment force in the A-share market.

At the end of the first quarter of 2021 , the scale of equity investments actively managed by mutual funds exceeded 6 trillion yuan, which reached a record high, according to China Fund News.

In the volatile A-share market, mutual funds are often expected to act as stock market stabilizers. This requires fund management companies to continuously drive the A-share market to embrace long-term investment and value investment from adjusting development strategies and strengthening investor communication. In this process, it is one of the important tasks to guide investors to view the short-term returns rationally.

"Over the past two years, investors have made relatively high returns. Such returns are not sustainable in the long run," says Shi Bo. "For investors, because of their linear thinking, the drop in returns often feels like a shock."

Shi Bo believes that the A-share market is characterized by bulls and bears, but in the long run, the market is still rising at a relatively healthy speed. As such, he believes that investors should stick to a long-term investment philosophy instead of simply buying on the upswing, and selling on the downswing.

In addition, Shi Bo says that China's fund investors are gradually becoming more mature. Indeed, he believes that the A-share market will show signs of reaching true maturity when more investors rebalance their asset allocation when prices fall and dare to “act against the trend”.

"Investors' confidence in China's capital market is improving, but more can be done to support this. Institutional investors need to adopt longer-term evaluation models to play their role as the backbone of the market," says Shi Bo.

A bottom-up approach

Looking forward, Shi Bo believes that the trend of domestic monetary policy is one of the key factors impacting the market. If credit is tight, for instance, some stocks with higher valuations in the early stage may face downward pressure. He also believes that commodity prices can be used to observe the strength of the global economic recovery, and also to help predict the profitability of companies in related industries.

At the same time, Shi Bo says that although the monetary policy of the US Federal Reserve has little impact on the domestic real economy, the emotional impact it triggers may have a short-term impact on the stock market. "Emerging markets may have concerns about capital outflows, and even a marginal decrease could affect investor sentiment," he says.

China is one of the markets that can't be missed by investors who focus on growth investment opportunities
Shi Bo deputy general manager and CIO (equity), Southern Asset management

However, even facing the uncertainties of macroeconomics, Shi Bo says the "bottom-up" approach is still very effective for investors. He believes that investors should focus on the fundamental factors that can support the long-term success of the enterprise, including the corporates' management, market space of the main business, and core financial indicators such as operation revenue, gross profit margin and net profit ratio, and carefully analyze the information behind the figures.

Shi Bo also says that matching valuations with growth is another key to investors' ability to earn good returns. Even for companies with good fundamentals, it is still hard for investors to benefit from high valuations. In the medium to long term, Shi Bo believes that the innovative and entrepreneurial capabilities of Chinese entrepreneurs will bring a constant stream of investment opportunities to the capital market. "China is one of the markets that can't be missed by investors who focus on growth investment opportunities." he says.

To help investors stabilize their confidence, Shi Bo believes that mutual funds can continuously promote a long-term investment concept and bring better investment experience to investors by increasing the proportion of locked-in products and strengthen investor communication.

Southern Asset Management has a history of about 23 years in equity investment, and is one of the first Chinese asset managers approved by the China Securities Regulatory Commission (CSRC). Since Southern Asset Management issued the first fund “Kai Yuan” in 1998, it has been among the top tier of equity investors in China.

With the continuous development of fintech, Southern Asset Management is trying to expand its investment advisory business. Based on investors' risk preferences, Southern Asset Management provides investors more comprehensive asset allocation recommendations through a rebalance adjustment strategy.

"We are quite optimistic about the investment advisory business because our clients are difficult to select fund products and make rational asset allocation,” says Shi Bo, “Therefore, we hope that we can use fintech to promote the depth of investment advisory business, and provide wider range of wealth management services through multi-department cooperation."

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