(Bloomberg) — A strong recovery in Chinese stocks is likely to trigger a shift in global portfolios as some investors rush to capitalize on the rally.
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The wave of money that previously left Chinese stocks in favor of Japanese and Southeast Asian stocks is about to reverse course after the latest wave of stimulus in Beijing, according to market observers. The shift is already underway: Equities in South Korea, Indonesia, Malaysia and Thailand posted net outflows last week, while BNP Paribas SA said more than $20 billion was withdrawn from Japanese equities in the first three weeks of September fetched.
The emerging rotation could mark the end of a great run for Asia ex-China stocks, which previously benefited as money managers hunted for better returns outside the world’s second-largest stock market. For much of this year, Taiwanese stocks were boosted by chip makers booming, while Indian stocks rallied on accelerating economic growth. Southeast Asian markets were lifted by lower US interest rates.
“We are reducing our long positions in Asia to fund purchases in China,” said Eric Yee, senior portfolio manager at Atlantis Investment Management in Singapore. “Everyone does that. It is a good policy-driven recovery from the low. You don’t want to miss an opportunity like that.”
The MSCI China Index has risen more than 30% from a recent low as authorities announced a barrage of measures to revive growth. Trade turnover in both China and Hong Kong reached record highs on Monday.
Attractive valuations have also helped. Even with the recent rally, the MSCI China index still trades at 10.8 times forward earnings, which is lower than the five-year average of 11.7 times.
Mutual funds around the world have a total allocation of 5% to Chinese stocks, the lowest level in a decade, according to EPFR data at the end of August, underscoring that there is room for funds to increase their investments.
“We believe some foreign investors are reducing their overweight in Japan and refocusing on China,” BNP strategists including Jason Lui wrote in a note on Wednesday.
To be clear, the shift is still in its early stages and BNP notes that there has not been a meaningful withdrawal of foreign money from India and products from emerging markets (ex-China).
Some, like Jeffrosenberg Chenlim, an analyst at Maybank Investment Bank Bhd., see the money flow as “a temporary event.” A gauge for Chinese stocks listed in Hong Kong fell as much as 4.9% on Thursday, which would mark a 13-day winning streak.
Although it is still early days, there could be “an argument for a rotation from Japan or India to China,” said Mohit Mirpuri, fund manager at Singapore-based SGMC Capital Pte. “China will be the star at the end of 2024. The current momentum is hard to ignore.”
(Adds analyst commentary, index moves in tenth paragraph)
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