GLOBAL fund managers who’d been holding back on China are wading back in.
The MSCI China Index has climbed 24 per cent from a January low, when worries over the Chinese economy, an entrenched property crisis, seemingly futile stimulus efforts and simmering tensions between Beijing and Washington had prompted many investors to pull back, or entirely cut, their China exposure.
That’s changing as an improving economic outlook and fresh government measures to shore up the housing market convince more and more global investors that the worst is over.
Even after the rally sputtered somewhat in recent weeks – with property shares retreating sharply from their highs – Chinese and Hong Kong stocks as a whole are still up by some US$2 trillion in market value since the January low, making China an outperformer among emerging markets. Newly confident investors see room for further gains, with Goldman Sachs saying the recent pullback “provides a better entry point” for investors, rather than a path towards a new low.
“The bottom has passed and it’s time to get invested,” said Gene Salerno, chief investment officer at SG Kleinwort Hambros in London.
Salerno’s firm was among managers that held back at the start of the rally, resisting the opportunity to get in at rock-bottom prices because government efforts were still seen as insufficient and it was “preferable to miss the initial leg of an elusive recovery rather than suffer a prolonged sell-off”.
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With the latest action from Beijing, and as investor sentiment has started to turn, SG Kleinwort is now slightly overweight China relative to its emerging market holdings. It joins firms including Vontobel Asset Management to SG and Ariel Investments that have increased their exposure. The turnabout is notable coming from this camp of investors, considering that many were burned amid the slide in Chinese and Hong Kong stocks from their 2021 peak, and after the false dawn in late 2022 when a reopening boom did not materialise.
Money is flowing into the market: The US$6 billion iShares MSCI China exchange-traded fund (ETF) saw its first weekly inflows of the year in May, and the most since January 2023. Among Wall Street strategists, UBS Group raised its recommendation on a key Chinese stock index to overweight in April, while HSBC said in May it’s “too early” to take profit.
Funds’ comeback
Ramiz Chelat, who manages US$700 million in emerging-market stocks at Vontobel, sees momentum in valuation and earnings that will drive further gains in Chinese and Hong Kong stocks. Having gone massively underweight in January on the asset class, Chelat started to add exposure in February and now has a close to neutral position in his fund.
“It’s focusing some of the global money to take a look at China again right now,” said Chelat. “A lot of global funds went to zero in China and probably think they need to own some high-quality businesses there now.”
The changed attitude is also seen in other platforms. Outstanding bearish positions on the US$2 billion Xtrackers Harvest CSI 300 China A-Shares ETF declined from about 20 per cent of the float in March to just 9.7 per cent as at Jun 6, according to data from S3 Partners.
“We are seeing a reversal of the short China and long everything else,” said Siguo Chen, portfolio manager at RBC Asset Management.
Not everyone is convinced, and serious issues linger. The property market is still under pressure, consumer sentiment is still weak and friction between Beijing and Washington remains. ETFs that focus on emerging-market stocks outside of China are still attracting steady inflows.
Some hedge funds took profits recently following a rally in property developer stocks while others have built short positions, betting these shares will fall, according to strategists at JPMorgan Chase.
For others, it’s still not worth being involved at all.
“Investors are quite reluctant to be exposed to the Chinese economy,” said Mabrouk Chetouane, head of global market strategy at Natixis Global Asset Management. “Seeing the government changing the rules from scratch is a risk that exists.”
Sector picks
Still, those willing to live with that risk see opportunities as optimism grows among market watchers that efforts by Beijing to revive China’s economy will translate into a boost for company earnings.
Vontobel’s Chelat likes businesses that cater to the phenomenon of consumers buying less expensive alternatives, such as PDD in e-commerce and H World Group in the budget hotel space. Insurance companies such as AIA Group are attractive due to strong consumer savings and the Chinese middle class using insurance as both a protection and an investment vehicle, Chelat said.
A majority of Christine Phillpotts’s China holdings are in the consumer sector. A portfolio manager at Ariel Investments in New York, she has added “meaningfully” to her underweight holdings in China since the end of March, making it the largest country overweight in her Ariel Emerging Markets Value Strategy.
Despite overall consumer sentiment remaining weak, Phillpotts said that a few companies have benefited from market share consolidation. Some, such as Great Wall Motor, have also pivoted to exporting to other emerging markets.
“From a fundamental basis, there’s a lot of legs for meaningful upside from here,” Phillpotts said. The downside from risks embedded in Chinese stocks is “overestimated”. BLOOMBERG
