The S&P Access China Enterprises Enhanced Value Index seeks to measure the performance of 100 Chinese companies with securities with attractive valuations that are eligible for the Stock Connect programs. Only one share class is selected to represent each company.
- What is the rationale behind the construction of the index?
The value factor is one of the oldest and most-established risk premiums in financial markets. Historically, stocks with attractive valuations have tended to outperform the broader market over medium- to long-term periods. The value premium exists in China’s A-share market1 and the Hong Kong market.2 With the introduction of the Stock Connect programs, new opportunities are emerging for value investors focusing on China.
The China A-share market looks expensive. As of Aug. 31, 2018, the S&P China A BMI Domestic traded at 15.7x trailing 12-month earnings versus the S&P Emerging BMI at 13.7x. More surprising, dual-listed stocks (those that trade as A-shares and H-shares) were trading at a large premium on the mainland. The premium or discount of A-shares relative to H-shares has been caused by market liquidity conditions and market participant structures and preferences, among other aspects. The prevalence of stock price differences may exist for quite some time and then tend to move toward long-term convergence.
The S&P Access China Enterprises Enhanced Value Index aims to benefit from a larger opportunity set, including onshore and offshore markets and relative premium or discount.
- How does the index work?
The index is constructed from the universe of southbound and northbound trading of the Shanghai-Hong Kong and the Shenzhen-Hong Kong Stock Connect programs. This includes ChiNext stocks.
It selects the 100 Chinese companies with attractive valuations based on three fundamental measures: book value-to-price, earnings-to-price, and sales-to-price ratios. The index is weighted by the product of market cap and value score.
For dual-listed companies, only the cheaper share classes would be considered. A buffer rule is in place to reduce turnover of existing constituents—the index does not switch share classes unless the premium is more than 5% at the rebalancing every six months.
