The Australian share market has been well supported by international investors in the past but the tide is turning and there are strong indications that our equity market will be marginalised by this important group over the next year, if not longer.
The outflow of offshore capital is driven by three significant factors. The first is China's renewed clampdown on money flowing out of the country. While the Chinese government has made a number of attempts to restrict capital moving out of the country before, this latest clampdown appears to be executed with conviction and the mysterious disappearance of the chairman of one of the county's largest financial institutions, Anbang Insurance Group, seems to underscore the seriousness of China's intent.
The second factor that is likely to keep international investors at bay is the relatively weak profit growth estimates here compared to other major share markets like the US. This is probably a major reason why the S&P/ASX 200 (Index:^AXJO)(ASX:XJO) is lagging its peers.
The other big news from last week is the inclusion of Chinese A-Shares in the MSCI global index. This historical move lends legitimacy to mainland Chinese shares and will open this asset class to the world. While only a tiny fraction of China's US$7.7 trillion A-share market will be included in the MSCI index, Credit Suisse estimates that Hong Kong and Chinese equities will make up nearly half of the regional index by 2030!
The proportion of Australian stocks in the index is set to halve to 6% and it's our biggest and most commonly held shares that are going to end up being the losers from this trend. This will have implications for Big Bank stocks, Telstra Corporation Ltd (ASX: TLS), Woolworths Limited (ASX: WOW) and our major miners as fund managers who follow the MSCI benchmark will be forced to ditch large cap ASX stocks for Chinese stocks.
But it isn't all bad news. A small handful of local stocks are likely to be beneficiaries of this change in the investment tide. Unfortunately, it won't be Australia and New Zealand Banking Group (ASX: ANZ) as it sold down its Asian businesses to focus on the domestic market.
On the other hand, international fund manager Platinum Asset Management Limited (ASX: PTM) is likely to benefit from the rise of Chinese stocks. Pity about its share price though as I think the stock will need to fall below $4 before I see value despite this positive longer-term thematic.
Two others that are well placed to ride the rise of Chinese equities are share registry and investor services group Computershare Limited (ASX: CPU) and investment banking giant Macquarie Group Ltd (ASX: MQG).
Computershare has said before that China is a lucrative market for its registry business. Credit Suisse estimates that the company currently generates around 7% of its revenues in the Asian region and its analysts believe there are growth opportunities for its investor services, employee share plans and stakeholder communication businesses.
Macquarie Group has operations in Asia and the broker believes that its Asian securities business is three times more important than Australian equities for Macquarie. This means the group has substantial operational leverage to any rise in Chinese securities.
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