Author: Naomi Rovnick
LONDON (Reuters) – Global investors are preparing to place bets on China again amid a major shift in sentiment sparked by Beijing’s drive to reverse an economic slowdown and revive long-term interest in its stocks.
This is just the beginning, and few money managers expect a Chinese growth boom in the near future. But government moves to encourage more cash to invest in stocks and a surge in consumer spending have made the still-low valuations of Chinese companies more attractive, say investors from groups that oversee more than $1.5 trillion in client funds.
“We will be very disciplined, but collectively we think there are more upsides than downsides,” said Gabriel Sacks, emerging markets portfolio manager at Abrdn, which manages assets worth 506 billion pounds ($677 billion).
He said the group bought Chinese shares “selectively” last week and would wait for more detailed policy plans from Beijing after some unusually outspoken promises of economic support that sent the stock market soaring in recent days.
Factory activity in China fell for a fifth straight month and the services sector slowed sharply in September, suggesting Beijing may need to act urgently to meet its 5% growth target by 2024.
PEAK PESIMISM IN THE PAST?
Long-term institutional investors largely stayed on the sidelines last week as hedge funds’ bonanza sparked a rally in Chinese stocks, data sent to clients by Goldman Sachs strategist Scott Rubner showed.
Rubner said that in delayed August, China’s equity holdings fell to 5.1% of portfolios, which was the lowest level in a decade.
Chinese consumer confidence has been severely damaged by the real estate crisis stemming from President Xi Jinping’s actions to stem the growth of risky debt in the real estate sector, estimated at over $1 trillion. Meanwhile, tensions between the US and China have escalated.
However, investors saw the tide turning when Beijing authorities vowed to spend as much as needed to meet the 5% growth target. They also eased some restrictions on home purchases, lowered interest rates on bank loans and offered brokers economical funds to buy stocks.
“There is too much of a disconnect between (Chinese stock) valuations and the policy improvement narrative,” said Natasha Ebtehadj of Artemis Fund Managers.
It added that it has added to its Chinese shareholding and taken up several novel positions in the past few days.
RALLY ON?
Chinese stocks posted their biggest daily gain since 2008 on Monday, but investors warned not to expect more such piercing moves in the low term.
“It’s a technical, liquidity-driven rally,” said George Efstathopoulos, portfolio manager at Singapore-based Fidelity International, adding that it was likely partly driven by low selling taking away bets on falling stock prices.
“There are probably a lot of options to cover short positions and there are probably a lot of hedge funds looking for short-term gains,” Abrdn’s Sacks said.
Investors pulled a net $1.4 billion out of larger China equity funds tracked by Lipper in 2024, reversing all inflows from 2023, a year marked by dashed hopes for a surge in consumer spending after the end of stringent COVID-19 lockdowns .
Efstathopoulos said he would wait until Chinese consumer confidence improves before buying more Chinese shares.
Mark Tinker, chief investment officer at Hong Kong hedge fund Toscafund, said Beijing’s latest actions showed China could build sustainable household demand rather than chasing rapid growth through another property or infrastructure boom.
“Growth at 5% is not worth it if all you do is encourage (more) destabilizing leverage,” he said.
Luca Paolini, chief strategist at Pictet Asset Management, which oversees more than 260 billion euros ($291 billion) of client funds, said investors may have overlooked the prospect of U.S. interest rate cuts boosting global demand and Chinese exports.
On September 18, the US Federal Reserve began the long-awaited cycle of easing monetary policy with a significant reduction in interest rates by 50 basis points.
“What we’re telling our clients this week is that if you don’t have anything (in China), you might want to add some positions,” Paolini added.
Noel O’Halloran, chief investment officer at KBI Global Investors, said he started buying Chinese stocks this summer because of the valuation and would not yet make a profit.
“When it comes to China’s allocations, it’s too early for many people to change their allocations, but I think the direction can only go in one direction, which is up.”
