Hold on for the ride: China’s STAR Market sees bumpy start to market-oriented reforms

Initial observations from Invesco Great Wall about China’s new tech board.

Invesco Great Wall fund manager Cheng Zhan shares his views on the impact and implications the STAR Market has for China's technology sector and capital market.

Aug 2, 2019 | Ruiwen Yang and Cheng Zhan

The STAR Market came into operation on the Shanghai Stock Exchange on July 22 and we have seen big fluctuations in share-price movements. As long-term, fundamentals-driven active managers, we at Invesco Great Wall think that clearer picture of the board's progress should emerge in six months' time.
 

In the meantime, we remain cautious of how stocks on the board are performing. Trading on the board is still risky given that some of the board's rules have never been tested before in China's domestic equity market. As such, we have internally set a low limit on how big of a percentage STAR Market stocks can take up in our strategies. 
 

Nevertheless, we applaud the innovations that the STAR Market brings to China's equity market. Currently, in the A-share market, there are many shell companies, or those performing very poorly yet commanding high valuations. Supportive market-reform policies and the practice of short selling - both being trialed on the STAR Market - can uncover the true value of these companies. Ideally, over time, poorly-performing companies should see big corrections in their valuations, while good ones should enjoy market recognition and therefore, significant premiums. With careful management, we think that about 100 companies can be listed on the board by year’s end.
 

As such, the STAR Market can foster a sense of "survival of the fittest" among listed companies in China's equity market. There is a hope that in due time, these innovations that the STAR Market can also be rolled out across other stock markets in China. We think that we would need at least a year's time before this can start to happen.
 

For now, we maintain that a professional, fundamentally-driven, long-term active approach is key to mitigating risks and uncovering opportunities on the board. 
 

We think that there are attractive investment opportunities in high-tech companies from sectors including artificial intelligence, big data, cloud computing, biomedicine, new-energy vehicles, semiconductor, internet and high-end equipment. We like these companies, because many of them have capable management teams that have managed to tap into tap into China’s domestic market potential, technological innovation and engineering prowess to raise their competitiveness.
 

Ruiwen Yang is Deputy CIO of Active Equity and Fund Manager at Invesco Great Wall. Cheng Zhan is Fund Manager at Invesco Great Wall.
 

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