[SINGAPORE] After a stellar climb in Chinese equities this year, market participants say a longer lasting rally will depend on a meaningful return of global funds.
The advances may have more staying power this time around on the back of DeepSeek’s technology breakthrough and the retreat of US exceptionalism – if foreign long-only funds come along for the ride, according to strategists.
“The longevity of this bull run is also a function of to what extent global mutual fund mandates” may rekindle their interest in Chinese equities after being absent from the previous few rallies, Goldman Sachs strategists including Kinger Lau wrote in a note dated on Sunday (Mar 9).
Despite a 12 per cent gain in the MSCI China Index last month, active funds have continued to sell shares in a sign of further scepticism about the long-term outlook of the market. Foreign inflows this year have been driven by passive money, as well as a rotation within Asian and emerging market portfolios, according to China International Capital.
Chinese stocks have seen multiple false dawns over the past few years, with stimulus-fuelled rebounds barely lasting more than a couple of months amid the lack of strong participation from foreign capital. Concerns over persistent deflationary pressures and geopolitical uncertainties kept them at bay even when valuations were enticing.
“Global institutional investors continue to shun China, especially given the threat of Trump 2.0,” said Qi Wang, chief investment officer of UOB Kay Hian Wealth Management. “They are waiting for more numbers to show the Chinese economy is indeed improving.”
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Recent weakness in the US stock market due to recession fears may encourage global capital to flow back into China’s long-shunned assets. Beijing’s pivot to focus on domestic consumption would also be a draw.
Still, foreign investors’ exposure to China remains at a historical low, Goldman strategists said. Their aggregate allocation to China was at 5.9 per cent as at end-January compared to a peak of more than 14 per cent in 2020, the brokerage’s data showed.
A key support for the artificial intelligence-driven rally in China markets has been strong buying from Chinese mainland investors, but that can be volatile as macro challenges remain.
“Without a powerful policy shift to decisively turn around the economy, the ability for this rally to extend beyond tech may be questioned,” said Claire Huang, senior EM macro strategist at Amundi Investment Institute. The firm maintains an overall neutral stance on Chinese equities and stays selective across different sectors. BLOOMBERG
