A significant rally in Chinese stocks is prompting a shift in global portfolios, as investors seek to capitalize on new opportunities, Bloomberg has reported.
Following Beijing’s aggressive economic stimulus measures, the flow of funds, which previously favored stocks from Japan and Southeast Asia, is reversing direction, according to market analysts.
Shares in markets like South Korea, Indonesia, Malaysia, and Thailand have seen net outflows, while BNP Paribas reports that over $20 billion has been pulled from Japanese equities in the first few weeks of September.
Strong gains in China, challenges for other Asian markets
The rotation of capital may signal the end of a robust run for non-Chinese Asian markets.
Earlier this year, Taiwan benefited from the booming chipmaking sector, while India saw its markets surge on the back of accelerating economic growth.
Southeast Asia also enjoyed a boost due to lower US interest rates, helping regional markets.
However, China’s resurgence, driven by favourable government policies, is now drawing investor attention away from these markets.
Eric Yee, senior portfolio manager at Atlantis Investment Management, confirmed the trend in the report,
“We are trimming our long positions across Asia to fund China purchases. Everyone is doing so. It’s a good policy-driven recovery from rock bottom. You wouldn’t want to miss out on such an opportunity.”
Chinese stocks see a 30% rise, attractive valuations remain
The MSCI China Index has surged more than 30% from its recent low after Chinese authorities rolled out a series of stimulus measures aimed at reviving economic growth.
Trading volumes in both China and Hong Kong hit record highs earlier this week.
Despite the rally, valuations remain attractive, with the MSCI China gauge trading at 10.8 times forward earnings, still below its five-year average of 11.7 times.
This leaves room for further gains, as global mutual funds currently have only a 5% allocation in Chinese equities—an all-time low over the past decade, according to EPFR data from August.
The possibility of more funds flowing into Chinese markets as investors reallocate resources is becoming more apparent.
Early stages of reallocation
While the shift toward Chinese equities is in its initial stages, BNP Paribas strategists, including Jason Lui, noted that investors are beginning to reduce their exposure to Japanese stocks and reallocate funds back into China.
Although this trend has yet to lead to significant outflows from Indian and other emerging markets, the potential for more substantial changes remains.
Maybank analyst Jeffrosenberg Chenlim sees the current fund flow as a “temporary event.”
However, others like Mohit Mirpuri, a fund manager at SGMC Capital, argue that China could be the top performer by the end of 2024.
“The current momentum is hard to ignore,” Mirpuri said, emphasizing the potential for China’s continued growth.
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