MSCI has recently increased the Chinese A-share market's inclusion factor from 5% to 20%.
The move recognises the improving openness and accountability of this dynamic asset class. To our mind, barring a major strategic change in direction on China's side, this trend is only going one way - namely towards more openness and more representation in global indices.
The move should increase China's standing among the investment community and drive fresh inflows into the A-share market. On the downside, there will be more people fishing in the pool, so good opportunities may become harder to come by.
The key is to look beyond the obvious. For example, we see strong potential in some of the so-called 'white liquor' companies - producers of a clear, grain-based alcohol baijiu.
This might sound surprising given all that has been written about the health of the Chinese consumer, but we see value in specific companies' fundamentals, especially in light of last year's pessimistic and unjustified sell-off.
Trends such as growing appetite for premium brands and innovation remain important. The industry is also becoming more streamlined through measures such as the cutting out of middle-man distributors.
For the higher quality baiiju companies, some of which are state owned enterprises (SOEs), the fact the brands are known nationwide has proved to be a strong 'pull' factor during a more testing period for consumer confidence.
Companies have also become more savvy, by demanding more from their distributors. Some of these changes have been in response to the more testing environment, but others have been the result of the consumer shift towards quality, as well as to broader reforms of SOEs where profitability is being encouraged over top line growth.
The general investor sentiment that 'SOEs = bad' and 'private enterprises = good' illustrates the danger of sweeping generalisations.
Being non-consensus can be a lonely place at times, but the strong fundamentals, light investor positioning and compelling valuations give us a high level of conviction in these businesses.
Avo Ora is manager of the Pictet Asia ex Japan fund
• Raised awareness of the diversity of investment options in China, which makes the country more 'investable'
• More foreign investor interest may prompt local management teams to focus on more sophisticated ways of running their businesses
• Even with MSCI inclusion, foreign participation in the market is low versus overall turnover
• Over the long term, major indices (Asia ex Japan, emerging markets, etc) will be tilted even more to China