(Bloomberg) — A robust recovery in Chinese stocks is likely to prompt a shift in global investment strategies as some investors scramble to join the rally.
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A surge of funds that previously exited Chinese equities for stocks in Japan and Southeast Asia is expected to change direction following Beijing’s recent stimulus efforts, market analysts suggest. The transition appears to be in progress: last week, stocks in South Korea, Indonesia, Malaysia, and Thailand experienced net outflows, while BNP Paribas SA reported over $20 billion withdrawn from Japanese equities during the first three weeks of September.
This emerging realignment may signal the end of a remarkable period for Asia ex-China equities, which had gained traction as investors sought better returns outside the world’s second-largest stock market. Throughout much of this year, Taiwan benefited from a surge in chipmakers, and Indian stocks advanced due to accelerating economic growth. Markets in Southeast Asia also thrived amid declining US interest rates.
“We are reducing our long positions across Asia to facilitate purchases in China,” stated Eric Yee, senior portfolio manager at Atlantis Investment Management in Singapore. “Everyone is following suit. It’s a promising policy-driven recovery from an all-time low. This opportunity is too good to overlook.”
The MSCI China Index has climbed over 30% since a recent low after authorities unveiled an array of measures aimed at stimulating growth. Both China and Hong Kong experienced record-high trading turnover on Monday.
Enticing valuations further support this trend. Despite the recent rally, the MSCI China gauge is trading at 10.8 times forward earnings, which remains below its five-year average of 11.7 times.
As of the end of August, mutual funds globally have allocated 5% to Chinese equities, marking the lowest level in a decade, according to EPFR data, indicating potential for increased investments.
“We believe some foreign investors are decreasing their overweight in Japan and reallocating their investments back to China,” noted BNP strategists, including Jason Lui, in a Wednesday report.
It’s important to note that this shift is still in its early phases, and BNP observes that there hasn’t been a significant outflow of foreign investment from India and emerging markets excluding China.
Some analysts, such as Jeffrosenberg Chenlim from Maybank Investment Bank Bhd., view the fund movement as “a temporary event.” A benchmark for Chinese stocks listed in Hong Kong fell by as much as 4.9% on Thursday, poised to break a 13-day winning streak.
While it’s still in the early stages, there could be “a compelling case for a rotation from Japan or India to China,” remarked Mohit Mirpuri, a fund manager at Singapore-based SGMC Capital Pte. “China is positioned to be the standout performer by the end of 2024. The current momentum is difficult to overlook.”
(Includes analyst commentary, index movements in the tenth paragraph)
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