Analysis: Global Investors Reassess Their Departure from China, According to Reuters

By Naomi Rovnick

LONDON (Reuters) – Global investors are shifting their focus back to China, driven by Beijing’s efforts to counter its economic slowdown and reignite interest in its stock markets.

Although it’s still early in the recovery process and few fund managers anticipate a significant growth surge in China in the near term, government initiatives aimed at boosting equity investments and stimulating consumer spending have made low valuations among Chinese companies more appealing, according to investors managing over $1.5 trillion in assets collectively.

Gabriel Sacks, an emerging market portfolio manager at Abrdn, which oversees £506 billion (approximately $677 billion) in assets, stated, "We will remain disciplined, but overall, we believe there is more upside than downside." He noted that his firm had selectively purchased Chinese stocks recently and is awaiting more specific policy details from Beijing following recent economic support measures that triggered a notable stock market rally.

Recent data showed that China’s factory activity contracted for the fifth consecutive month, and the services sector saw a sharp slowdown in September, indicating that the government may need to act swiftly to achieve its 5% growth target for 2024.

IS PESSIMISM FADING?

Long-term institutional investors largely remained cautious last week, even as hedge funds drove up Chinese stock prices in response to anticipated stimulus measures, as indicated by data from a Goldman Sachs strategist. Additionally, mutual funds’ China equity holdings dropped to a decade low of 5.1% of portfolios by late August.

The Chinese consumer market has been impacted heavily by a property crisis stemming from President Xi Jinping’s attempts to curb escalating risky real estate debt, estimated to exceed $1 trillion. This issue, combined with rising tensions between the U.S. and China, has contributed to the general sentiment of caution.

However, some investors believe a shift is on the horizon after Chinese authorities committed to spending as needed to meet the 5% growth target. Measures such as easing home-buying restrictions, lowering bank lending rates, and providing brokers with inexpensive funds for stock purchases have complemented these efforts.

Natasha Ebtehadj from Artemis Fund Managers remarked, "There is a significant disconnect between current stock valuations and the improving policy outlook." She indicated that she had increased her Chinese equity holdings in recent days and initiated new positions.

WILL THE RALLY CONTINUE?

Chinese stocks experienced their most substantial daily gain since 2008 recently; however, investors urged caution regarding expectations for similar future rallies. George Efstathopoulos, a portfolio manager at Fidelity International, described the recent surge as a technical, liquidity-driven rally, partly propelled by short sellers closing out their positions.

Abrdn’s Sacks echoed this sentiment, noting that a substantial amount of short covering was likely occurring, with hedge funds participating for potential short-term gains.

So far in 2024, investors have withdrawn a net $1.4 billion from Greater China equity funds tracked by Lipper, reversing all inflows from the previous year, which had been characterized by unmet expectations for a consumer spending rebound after the end of strict COVID-19 lockdowns.

Efstathopoulos mentioned he would hold off on additional Chinese stock purchases until consumer confidence improves. Mark Tinker, the chief investment officer at Toscafund Hong Kong, observed that Beijing’s recent actions could point toward fostering sustainable household demand rather than pursuing rapid growth through another property or infrastructure boom.

He noted, "Growth at 5% is not beneficial if it merely encourages further destabilizing leverage."

Luca Paolini, chief strategist at Pictet Asset Management, which manages over €260 billion (about $291 billion) in client funds, highlighted that investors might be overlooking the potential for U.S. rate cuts to boost global demand and enhance Chinese exports, especially following the U.S. Federal Reserve’s recent interest rate reduction.

"What we are advising our clients this week is that if they have no exposure to China, they may want to consider adding some positions," Paolini remarked.

Noel O’Halloran, chief investment officer at KBI Global Investors, noted that he began acquiring Chinese stocks this summer based on valuation criteria and intends to hold off on taking profits for now. "While it’s still early for many to alter their allocations to China, I believe the general direction is upward."