Home and Away: Equity Flows in China
Despite recent volatility, both foreign and domestic investors are still favouring the China A-share market, as evidenced by net inflows and outstanding margin trading balance (Figures 1-2). This is reasonable, in our view, given the lower regulatory risk for A-shares compared with their offshore counterparts.
However, attitudes towards offshore listings tell a different story. While the flow of domestic capital into Hong Kong listings went vertical in 2020 and early 2021, we are now seeing a levelling off – although no one is fleeing the market yet (Figure 3). Foreign investors are also becoming more wary, with some de-risking, but we are yet to see a concerted move to start shorting (Figures 4-5).
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Source: Hong Kong Stock Exchange, Shanghai Stock Exchange, Shenzhen Stock Exchange; as of 18 August 2021.
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Source: Shanghai Stock Exchange, Shenzhen Stock Exchange; as of 18 August 2021.
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Source: Hong Kong Stock Exchange, Shanghai Stock Exchange, Shenzhen Stock Exchange; as of 18 August 2021.
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Source: IHS Markit, Man Numeric; as of 17 August 2021. Note: rebased to zero as of January 2015.
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Source: IHS Markit, Man Numeric; as of 17 August 2021. Note: rebased to zero as of January 2015.
Revalue or Lose Them: M&A and UK Equities
After a significant period of underperformance since the 2016 Brexit referendum, we are seeing an increased interest in UK-listed firms being taken private (Figure 6). M&A deal value now represents almost 12% of UK market cap, nearly double the global average (Figure 7), which has provided a consistent tailwind to the country’s equity markets since the start of the year.
The relative cheapness of UK-listed firms compared to other geographies is surely a factor driving M&A activity. However, it is also partly a function of record levels of private equity dry powder1, as global asset allocations to private markets increase in response to persistently low interest rates: the US, Japan and Europe have also seen an uptick in their M&A rates.
In the context of market cap being subject to bid activity, we have just eclipsed the highs seen at the end of 2015. The key contrast we would make today however is that the bid activity is less concentrated and much more numerous. For example, the spike in 2015 was almost entirely accounted for by the bids for FTSE 100 heavyweights such as SAB Miller and BG Group. Today it is far more widespread, and we have now had over 25 deals announced so far this year. The message would seem to be that we need to either revalue UK equities, or else they will be removed from the public market.
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Source: Bloomberg, Man GLG; as of 30 June 2021.
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Source: Bloomberg, Man GLG; as of 30 June 2021.
With contributions from: Ziang Fang (Man Numeric, Senior Portfolio Analyst), Jack Barrat (Man GLG, Portfolio Manager) and James Houlden (Man GLG, Assistant Portfolio Manager).
1. Bloomberg, ‘Record Sum of Dry Powder Ready for Pandemic-Hit Firms, ICG Says’, 8 January 2021.
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