Creating on-the-ground equity research capabilities in China

Published on June 27, 2017 by Ramesh Punugu

On June 21, 2017, MSCI announced it would include 222 mainland China-listed stocks (A shares) to its flagship emerging markets index. This move is expected to increase demand for China stocks, as an estimated $1.6tn of funds that track this index increase allocation to China. This, coupled with the Stock Connect program (that allows international investors to directly invest in Shanghai- and Shenzhen- listed stocks) is likely to spur demand for mainland China-listed stocks.

Although China is the second-largest market by market capitalization after the US, international investors currently hold less than 2% of the market. This demonstrates the potential for international investors to increase allocation to China equities.

However, international investors face significant challenges in investing in China.

Lack of on-the-ground presence: Many global investors lack an on-the-ground presence in mainland China and, thus, miss out on potential opportunities in the region. Furthermore, investment talent is scarce and expensive.

Lack of internal bandwidth to ramp up coverage: Asset managers’ investment teams may lack internal bandwidth to move quickly to identify investment opportunities in this market. This, along with disclosure issues (quality of disclosures and Mandarin language challenges), significantly inhibits the investment teams’ ability to cover this region from distant global financial centers.

Limited sell-side research coverage: Coverage of mainland China equities by global sell-side firms has so far been limited. While there is some local sell-side research coverage, particularly on large companies, the quality of research is patchy at best.

To effectively cover this market, asset managers need to create large in-house research teams, proficient in Mandarin. This is where companies like Acuity Knowledge Partners can step in and help global investors keen on investing in China equities.

MA Knowledge Services has been present in Beijing since 2009 and currently has over 100 analysts (MBAs, CFAs, and accountants), proficient in Mandarin, who help global asset managers scale up their research coverage in this market, while reducing overall costs and time to market. MA Knowledge Services has been able to accomplish this by setting up dedicated teams of analysts for each client. These analysts work on various types of client-specified research assignments, including financial modeling and valuation, conducting background research (on companies/sectors/investment ideas, market sizing, etc.), gathering primary and secondary data, preparing for company visits, and providing earnings season support, as well as a host of other value-added research (accounting diagnostics, ESG research, etc.). Unlike brokerage research, the analysts work on custom research projects for clients – each research output reflects the corresponding client’s proprietary and differentiated research process. This exclusivity not only provides clients with a unique proposition, but also gives them a sustainable edge.

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