China’s $2.7 trillion stock rally lures global fund holdouts despite risks

Global fund managers who had 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 is 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 (S$2.69 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 Group 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 Mr Gene Salerno, chief investment officer of SG Kleinwort Hambros in London. 

Mr 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”.

With the latest action from Beijing, and as investor sentiment has started to turn, SG Kleinwort is now slightly overweight on 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 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 is “too early” to take profit. 

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.

Exchange-traded funds 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 & Co. 

For others, it is still not worth being involved at all.

“Investors are quite reluctant to be exposed to the Chinese economy,” said Mr 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.” 

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