Chinese stocks are increasingly attractive to international investors on the prospect of the country’s economic growth stabilizing as the capital market is hedged elsewhere.
A glimpse of the capital heading north – the amount foreign investors are buying in the A-share market through the stock connection mechanism linking the Shanghai, Shenzhen and Hong Kong stock exchanges – may reflect the attractiveness of A-shares in a context of prospects for a recovery in economic growth.
From June 1 to 17, the northbound capital saw a total inflow of nearly 58.7 billion yuan ($8.7 billion), sharply contrasting with the 45.1 billion yuan outflow in march.
International investors have poured capital into the A-share market since mid-May, showing the most interest in the industrials, utilities and financials sectors, according to Credit Suisse calculations.
Indeed, A-share industrial companies have replaced consumer staples as the sector international investors have had the most exposure to in recent months, said Will Stephens, head of quantitative and systematic strategy at Credit. Switzerland in Asia-Pacific.
Not only are foreign investors interested in large-cap A-share blue chips whose development prospects are underestimated, but they are also eyeing mid- to small-cap companies with high growth potential that do not have been fully considered, Stephens said.
According to Shanghai-based market tracker Wind Info, foreign institutions have conducted 575 studies of small-cap companies listed on the tech-heavy ChiNext in Shenzhen, Guangdong province since early April. They also conducted another 641 studies of companies trading on the Shanghai Stock Exchange’s STAR market. During the same period, only 265 studies were conducted on large-cap companies listed on the main A-share table.
Investors poured nearly $270 million into the $7.2 billion iShares MSCI China Exchange Traded fund on June 14, the biggest daily inflow since BlackRock launched the fund in 2011.
It is the largest foreign exchange-traded fund in the world that tracks Chinese stocks.
KraneShares CSI China Internet ETF, the second-largest China-focused ETF managed by New York-headquartered Krane Funds Advisors LLC, also attracted net capital inflows of approximately $454 million over the past 30 last days.
“Chinese equities rallied amid tighter global liquidity, pointing to changes in China’s macroeconomy. A-shares are now increasingly attractive to international investors,” said Max Luo, China director of asset allocation at UBS Wealth Management during a half-year outlook meeting on June 21.
Luo said the A-share market logic has changed. This conclusion is supported by the recent stronger rather than weaker performance of the A-share market when the US dollar strengthens.
The A-share market rallied as production picked up after the latest resurgence of COVID-19 was contained and stimulative economic policies began to take effect. As of June 24, the benchmark Shanghai Composite Index had gained nearly 5.3% this month, and the Shenzhen Component Index had risen nearly 10%.
On the other hand, the mood has been sour in the US stock market following the Federal Reserve’s interest hikes to curb soaring inflation. As of June 23, the Dow Jones had fallen 6.5% in June and the Nasdaq had lost more than 6.3%.
The northward influx of capital also helped boost sentiment in the A-share market, UBS’s Luo said. But their profitability will improve as China’s economic growth picks up.
“Overall, there are positive signals for the Chinese stock market. Chinese equities are welcomed not only by investors looking at Chinese assets or by those considering global asset allocation,” he added. .
The manufacturing purchasing managers’ index, back in expansion territory for the first time since February, showed a V-shaped rebound to stand at 50.2 in June. As Black-Rock experts understand, this is enough to be considered a turning point, showing that the impact of the latest resurgence of COVID-19 has been brought under control.
To further facilitate China’s economic recovery, more supportive monetary and fiscal policies will be introduced, BlackRock experts said. Home buying policies could be eased in some parts of the country, and consumption coupons or subsidies in some Chinese cities will boost consumption. In this context, we can expect an economic recovery in the second half of the year, which will be a positive signal for the stock market, they said.
While Credit Suisse’s Stephens pointed to the relatively low correlation between the A-share market and other global markets, which will help international institutions diversify their investments, experts at Founder Securities described the A-share market as a ” safe haven” for foreign investors, especially when foreign markets are lackluster.
With the easing political environment, A-share indices will continue to rise amid swings. Technology and growth companies will be responsible for most of the structural performance in the coming months, analysts at Founder Securities said.
Chinese bonds are also on the rise. The 5 billion yuan bond issued by the People’s Bank of China in the Hong Kong Special Administrative Region on June 21 was well received by the market. The six-month bill with a coupon rate of 2.3% saw its bids reach 22.8 billion yuan, about 4.5 times the issued value.
Investors’ quest for bonds reflected the attractiveness of renminbi assets for overseas investors and global investors’ confidence in the Chinese economy, according to the PBOC.
Data from the Institute of International Finance showed that $2 billion was injected into the Chinese bond market in May, a period during which most emerging markets saw net outflows of foreign capital.
Matt Simpson, analyst at Gain Capital, estimated that up to $10 billion would flow into the Chinese bond market every quarter until the end of 2024, given that the FTSE Russell had included Chinese government bonds in its world government bond index.
Source: China Daily