20141009-高盛-Quant-related_implications_for_the_China_A-share_market_21页_572kb

SH-HK Connect: Quant Perspective Summary

Core Content

This document explores the potential impact of the SH-HK Stock Connect on the China A-share market by analyzing historical trends in the Korean and Taiwanese markets after their inclusion in the MSCI Emerging Markets (EM) Index. It emphasizes how foreign investor participation and market liberalization influence factor performance and investment strategies.

Main Points

• Factor Performance Changes in Stages: The inclusion of markets in the MSCI EM Index leads to gradual changes in factor effectiveness. This is observed in both Korea and Taiwan, where factor performance evolved over time as foreign investors entered the market.

• Role of Retail Investors: Before foreign investor access, retail investors heavily influenced the Korean and Taiwanese markets, leading to strong near-term price mean reversion effects. This behavior is attributed to psychological anomalies like the disposition effect and herding behavior.

• Shift in Factor Effectiveness: After foreign investors gained access, the effectiveness of fundamental factors such as profitability (ROE, ROA) and valuation (P/E, D/E) improved. Conversely, short-term price reversal effects weakened, and long-term momentum factors became more prominent.

• China A-share Market Characteristics: The China A-share market already exhibits strong near-term price mean reversion, similar to Korea and Taiwan. Profitability and growth factors are particularly effective, with operating profit growth being a key alpha generator.

• Expected Impact of SH-HK Connect: The mutual stock market access between Shanghai and Hong Kong is expected to bring gradual changes in factor effectiveness. However, the influence of foreign investors is not expected to be immediate, as the market already has a strong set of effective factors.

Key Information

• Factor Groupings Analyzed:

  • Value (e.g., P/E, P/B, Dividend Yield)
  • Growth (e.g., Sales Growth, Operating Profit Growth)
  • Profitability/Financial Health (e.g., ROE, ROA, D/E)
  • Share Price Returns (1M, 3M, 6M, 12M, 24M)

• Performance Highlights:

  • Dividend Yield: Highest Information Ratio (IR) and stable Information Coefficient (IC), indicating strong effectiveness as an alpha factor.
  • Operating Profit Growth: Highly effective factor with consistent performance across periods.
  • ROE and ROA: Improved effectiveness after the rise of local institutional investors.
  • D/E Ratio: Became more important due to increasing debt default risks in a slowing economy.

• Shareholder Composition:

  • In Korea and Taiwan, retail investors dominated before foreign participation, leading to strong mean reversion effects.
  • As foreign and institutional investors increased, the market became more efficient, and fundamental factors gained traction.
  • In China, retail investors’ share ownership has declined, while local institutional investors have grown, leading to a similar trend in factor effectiveness.

• Quantitative Analysis:

  • Factor effectiveness is measured using sector-adjusted ICs and IRs.
  • The analysis period spans from January 2001 to August 2014.
  • The 10 most actively traded stocks ratio has declined in both Korea and Taiwan, indicating reduced herding behavior and increased market efficiency.

Investment Strategies

• Effective Strategies: Investment strategies based on profitability, valuation, and growth factors are likely to remain effective in the China A-share market even with increased foreign participation.
• Long-Term Momentum: As foreign investors enter, long-term price momentum (12-24 months) is expected to become more effective.
• Risk Considerations: The D/E ratio and similar indicators will grow in importance due to the risk of debt default in a slowing economy.

Conclusion

The SH-HK Connect is expected to bring gradual changes to the China A-share market, similar to the Korean and Taiwanese markets. While the near-term price mean reversion effect may weaken, fundamental factors like profitability and valuation are already effective and will likely continue to play a key role. The influence of foreign investors is not expected to be immediate, as the market has already developed a strong set of effective factors. A combination of fundamental and momentum-based strategies is anticipated to be successful in the evolving China A-share market.

Key Figures and Trends

• Korea:

  • MSCI EM inclusion: 1992 (20% IF), full inclusion: 1998.
  • Strong near-term price mean reversion before inclusion, weakened after full inclusion.
  • P/E and dividend yield became more effective after inclusion.
  • D/E, ROE, and ROA effectiveness improved significantly.

• Taiwan:

  • MSCI EM inclusion: 1996 (50% IF), full inclusion: 2005.
  • Similar trend to Korea, with near-term mean reversion weakening and longer-term momentum improving.
  • P/E and dividend yield improved effectiveness.
  • ROE and ROA became more effective, while D/E remained relatively stable.

• China A-share Market:

  • Strong near-term price mean reversion effect, consistent over time.
  • Operating profit growth is a highly effective factor.
  • Dividend yield and P/E have shown improved effectiveness since 2011.
  • Local institutional investors have played a key role in shaping factor effectiveness.

Disclosures

• Goldman Sachs may have a conflict of interest due to its business relationships with companies covered in its research.
• This report should be considered as only one factor in making investment decisions.
• Analysts employed by non-US affiliates are not registered/qualified as research analysts with FINRA in the U.S.

Appendix Summary

• The appendix provides further insights into the impact of market liberalization on Korea and Taiwan, highlighting the role of MSCI EM inclusion and direct foreign participation in shaping market dynamics.
• Similar trends are expected in the China A-share market as foreign investors gain access.