Equities expected to retain their longer-term investment appeal

Chinese equities are expected to retain their longer-term investment appeal despite spillovers from heightened global market volatility, underpinned by China's distinct technology opportunities and ongoing reforms to improve shareholder returns, experts said.

The A-share market has been fluctuating amid external volatility as rising US long-term Treasury bond yields and sticky inflation expectations — alongside ongoing geopolitical tensions — put global equities under pressure.

Domestically, concerns that the current listing wave of tech champions — such as chipmaker CXMT and Unitree Robotics — might possibly strain market liquidity also weighed on the market.

READ MORE: CXMT surges 465.82% on debut, becomes A-share's most valuable listed company

A shares ended mixed on Tuesday, with the benchmark Shanghai Composite Index edging up 0.19 percent to 3,889.44 points, while the growth-oriented ChiNext Index fell 1 percent to 3,397.52 points.

Despite the recent volatility, UBS' medium-term view on Chinese equities remains constructive. The Swiss wealth manager continues to rate China equities as attractive, while emphasizing that the opportunity set is broader and more balanced than it was earlier in the year.

James Wang, head of China strategy at UBS Investment Bank Research, said that northbound flows via the stock connect programs turned net positive in the second quarter, with a record $33 billion in net inflows into A shares.

That was compared to a $1.8 billion outflow in the previous quarter, Wang said, led by purchases in the industrials and information technology sectors.

Zhu Liang, chief investment officer for AllianceBernstein in China, said the Chinese market offers opportunities arising from both growth-oriented sectors and ongoing reforms.

"In artificial intelligence, while Chinese tech companies exposed to global export supply chains could be affected by overseas volatility, a more diversified range of AI opportunities — including those engaged in homegrown alternatives to imported technologies and cost-effective large language models — continues to offer investment value."

Nevertheless, Zhu said investors should avoid excessive concentration in a single AI theme given the historically extreme valuation gap between A-share high and low-valuation sectors, citing city commercial banks as a potential sector to help offset volatility associated with the AI theme.

On the reform front, Zhu said regulators have been advancing improvements in corporate governance, while listed companies have gradually increased dividend payouts and share buybacks. The overall market has begun to see net share buybacks rather than net financing, providing support for A-share performance.

At a meeting of the Political Bureau of the Communist Party of China Central Committee on July 30, it was stressed that comprehensive reforms of investment and financing in the capital market should be deepened to enhance its resilience and boost market confidence.

Kelvin Tay, chief investment officer for Asia at Pictet Wealth Management, said the large-scale offerings of emerging technology champions in China may create a short-term imbalance between stock supply and demand, weighing on market performance this year.

However, such near-term pressures do not undermine the longer-term investment case for China, Tay said, adding that he sees exposure to China as essential for investors' portfolios over the next five to seven years.

"The newly listed companies have strong fundamentals, with decent profitability and positive net cash flow, pointing to solid long-term growth potential for the Chinese stock market," Tay said.

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Liu Jipeng, a professor at China University of Political Science and Law and a senior capital market expert, said a healthy bourse should enable the majority of investors to benefit from long-term value creation, rather than becoming a zero-sum game in which gains by a small group come at the expense of others.

Liu said regulatory efforts should prioritize market fairness, arguing that some quantitative trading strategies that rely on technological advantages to profit at the expense of ordinary investors should be better regulated.

Tian Xuan, dean of Peking University's Guanghua School of Management, suggested that policies for refinancing — as well as mergers and acquisitions — should be further optimized so that the quality of listed companies can be improved from the outset.

Contact the writers at zhoulanxv@chinadaily.com.cn