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For investors looking for greater global exposure, here’s some good news: China’s equity market is opening up, with the addition of onshore Chinese shares, called A-shares, to MSCI indexes.

Read: How stocks from mainland China are finding their way into funds and ETFs

The addition of these shares can be viewed as “a key first step in opening access to the full range of Chinese equities,” says Richard Turnill, global chief investment strategist at BlackRock, in weekly market commentary. “It gives investors exposure to what we see as some compelling domestic sectors and supports our preference for EM Asia including China.”

Further, increased access to these shares offers diversification benefits, Turnill says, explaining that, historically, A-shares have a lower correlation to global equities than broader emerging market stocks or Chinese shares listed offshore in Hong Kong.

One reason for the lower correlation: “A-shares have been isolated from foreign capital by restrictions on foreign ownership and have been heavily influenced by the higher-frequency trading of local retail investors,” says Turnill. Other factors include different sector exposures and ownership structures.

The shares thus provide investors with more complete exposure to the Chinese economy, says Turnill, as well as greater access to some of China’s attractive growth stories.

A look at risks

As with any investment, there are risks, however.

“Chinese equity volatility has been twice that of global equities since 2006, and A-shares staged a spectacular boom-bust in 2015,” says Turnill. On the plus side, he says regulators have since implemented reforms, and MSCI inclusion focuses on select A-shares.

U.S.-China trade tension is another risk; however, “A-shares’ greater domestic exposure can potentially help cushion equity investors against trade risks,” says Turnill.

In a May report, Robert Horrocks, chief investment officer at Matthews Asia, downplays global trade tensions.

“Despite the headline concerns over a trade war, I think Asia’s political and economic environment looks strong for long-term growth,” he says in the report. “Foreign investors should take some comfort from that—if they can see beyond the headlines.”

Specifically, Horrocks champions China, as it builds significant infrastructure and embraces trade and globalization. He says he’s confident that U.S.-China tensions can be resolved.

Read: Investing during tough times for trade

Beyond risks, another important point for investors is that A-shares’ correlation with global equities may rise as foreigners increase exposure, but “we expect this to take years, not months,” says Turnill. “For now, we see A-shares offering diversification benefits and fuller exposure to China’s old and new economies.”

For full details on A-shares, read the full BlackRock market commentary. For more on Asia’s stability, read the full Matthews Asia report.

Also read:

Geopolitical risk indicators rising: BlackRock

Originally published on Advisor.ca
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