Global asset managers and hedge funds, after a prolonged period of caution towards China, are signaling a potential shift in sentiment. Observing nascent signs of recovery in the mainland, these financial institutions are finding value in China’s undervalued stock markets.
While foreign inflows remain modest, industry players are revising their stance, citing volatility in U.S. stocks and recent policy initiatives in China as catalysts for renewed interest.
Fidelity International, a U.S. asset manager, points to China’s more accommodative monetary policy and a substantial 1 trillion yuan ($137.10 billion) sovereign bond plan as positive indicators for the country’s stock markets. Marty Dropkin, Head of Equities, Asia Pacific at Fidelity International, suggests that the current global landscape, coupled with individual risk tolerances, may prompt a shift from U.S. investments to Chinese markets.
Somerset Capital Management, a London-based fund manager with £3 billion in assets, shares this optimism. Mark Williams, Portfolio Manager of its Asia Strategy, notes the positive impact of looser monetary and fiscal policies on company earnings within their portfolio. The fund is increasing exposure to sectors such as sportswear and electric vehicles, anticipating growth in consumer demand.
Despite a recent peak in pessimism, particularly amid China’s larger stimulus plans and state spending, the stock market is yet to fully recover. The MSCI China index remains down by 11% for the year, while U.S. stock indexes, S&P 500 and Nasdaq, have seen gains of 15% and 32%, respectively. Japan’s Nikkei has surged by 25%.
Morgan Stanley’s data reveals that long-only foreign investors currently maintain their most underweight positions in China and Hong Kong equities in years, offloading nearly $10 billion worth of Chinese equities in the past three months – the largest outflows since 2018.
Chinese stocks, as a consequence, have witnessed a decline in their price-to-earnings ratio to 11%, marking the lowest among major Asian markets.
Patrick Ghali, Managing Partner of Sussex Partners, a London-based hedge fund advisory, reports a noticeable shift among clients who are reconsidering their China allocation strategy, now contemplating contrarian entry points and re-engaging with the market.
Morgan Stanley data further indicates a slight reversal in flows, with foreign investors purchasing $924 million of China A-shares via the Hong Kong-China Stock Connect link during the first week of November, marking the first net inflows since August.
Amid these developments, the benchmark Hong Kong stock index has experienced a 1.7% rise this month, led by a surge in healthcare and tech shares, following three consecutive months of losses. The Hang Seng Tech Index is also up 5.1% in November.
The International Monetary Fund has upgraded its 2023 growth forecast for the Chinese economy to 5.4%, further contributing to the positive outlook.
Investment firm Cambridge Associates notes Middle East investors finding China’s attractive valuations appealing and allocating funds accordingly.
Triata Capital, a Hong Kong-based hedge fund, anticipates an attractive risk-reward ratio in internet and e-commerce giants, pointing out that excessive investor pessimism has distorted valuations.
Vivek Tanneeru, Portfolio Manager at Matthews Asia, a San Francisco-based asset manager, maintains an overweight position on China, anticipating a boost in sentiment from improved consumer confidence and warmer U.S.-China relations. He is strategically adding select industrial, travel services, and medical services companies to his portfolio.
However, some analysts remain cautious, suggesting that the current positive sentiment might be short-lived. Redmond Wong, Greater China Market Strategist at Saxo Markets, notes concerns about China’s long-term productivity and growth strategies, referring to the government’s priorities around governance and anti-corruption efforts.
(Note: $1 = 7.2939 Chinese yuan renminbi)
