China's Stock Woes Don't Deter Robeco From Starting A-Share Fund

(Bloomberg) -- It may be Asia's worst-performing share market this year, but when Victoria Mio looks at Chinese equities she just sees potential.

Whipsawed by Beijing's efforts to clean up the financial system, mainland stocks have wiped out their gains in 2017, as money flows into Hong Kong-listed shares seen as insulated from the crackdown.

But to Mio -- chief China investment officer for the Hong Kong unit of Robeco -- the so-called A-share market is too big to ignore. The Dutch asset management firm is opening its first mainland fund to outside money, betting on a turnaround that will deliver double-digit gains in 2017.

Mio, who will run the new fund targeted at European clients, expects August to be key for China, with an anticipated boost in company earnings likely to “drive the market upwards,” she said in an interview.

“There's potential for valuation re-rating,” said Mio. “It's a market that offers a lot of good investment opportunities that you cannot find overseas.”

Whether she's right remains to be seen. Local investors have been shunning the mainland market amid anxiety over where the regulators will hit next. Volumes have withered by more than 80 percent from their June 2015 peak, and 100-day volatility on the Shanghai Composite Index dipped to its lowest point since at least 2007 in May. While suspected state intervention has helped lift the index from its 2017 nadir, analysts have been paring their forecasts.

Read more: China Ups the Ante in Bid to Quash Financial Risk: QuickTake Q&A

The impact of the deleveraging campaign is likely to be felt more in bonds than stocks, given about 90 percent of the leveraged funds from bank products targeted by the move are invested in debt, Mio said. She also expects the authorities to be better coordinated this time around than they were during China's boom-and-bust equity cycle of 2015.

Rotterdam-based Robeco managed $154 billion of assets as of the end of March, and the portfolio Mio manages was valued at about $450 million. The company has established a Shanghai-based research team to focus on A shares.

The main reasons for Mio's bullishness are:

• EARNINGS: Mainland companies in the MSCI China A International Index are expected to report a 19 percent bounce in first-half profit when the August reporting season comes around, she said. Balance sheets will improve on China's capacity cuts and as new economy companies in the technology, consumer and health spaces deliver strong growth. 
• INFLOWS: Mio expects MSCI Inc. to include some A shares in its indexes in its June review -- a move that could open them up to investment from around the world. This fund will help Robeco get a jump on that shift, she said.

MSCI is facing pushback from analysts over its A-share proposal -- read more here.

“We think that there's a very high likelihood of A shares being included, and we are receiving investor interest,” Mio said. “We want to be ready whenever our investors are ready to engage in this market.”

To contact Bloomberg News staff for this story: Amanda Wang in Shanghai at twang234@bloomberg.net.

To contact the editors responsible for this story: Richard Frost at rfrost4@bloomberg.net, Emma O'Brien, Sarah McDonald

With assistance from Amanda Wang