Least Crowded China Stocks Outperformed More Crowded Ones, Says Citi

According to analysts from Citi, China’s least favored stocks have significantly outperformed their more popular counterparts during the recent market rally. A notable shift in investor sentiment, spurred by an unexpected and stronger policy direction in China, has led to a rapid adjustment in underweight positions across the country. This change has resulted in substantial gains for underinvested sectors and stocks.

Citi reports that the least crowded stocks in the MSCI China index have surged by an impressive 25%, greatly outpacing the 15% returns of the most crowded stocks. “Nearly all stocks in the CSI 300 were up this week, with the index rising more than 15% over the past four days and an increase in net new long positions in China A50 futures,” noted the analysts. This performance underscores that underinvested stocks have been the primary beneficiaries of the recent policy developments.

The change in sentiment can be partly attributed to foreign investors adjusting their portfolios. Over the past year, regional investors have tended to favor Indian stocks while maintaining a minimal exposure to Chinese stocks. This trend has led to a strong inverse relationship between foreign investments in India and China. As China’s market begins to show signs of recovery, some investors might look to take profits from their Indian holdings to reallocate to China.

However, Citi cautions that there are risks associated with the current momentum, describing it as “fragile.” The analysts highlight extreme positions of being underweight in China and overweight in India, warning that the momentum could be susceptible to sudden shifts.

For investors keen on taking advantage of this trend, Citi suggests focusing on underinvested Chinese stocks and developed market stocks with significant exposure to China to potentially capture further gains.