ASEAN, Mid-East institutions eye China stocks as West retreats
While US and European institutional investors have been withdrawing from China in recent years, their counterparts in Southeast Asia, the Middle East, and other markets are still showing interest in the world's second-largest economy
“We still get a lot of requests from investors all over the world…The interest in China remains,” said William Fong, head of Hong Kong China equities at Barings.
“In the past, we may have had more investors from the US and Europe. But nowadays we may receive calls from the ASEAN countries, Middle East, and even South Africa,” he told AsianInvestor.
Barings
However, before increasing allocations, these investors want to see stronger policy signals and economic data from Beijing, asset managers say.
These institutional investors seek insights on China's macro backdrop, including the property market, unemployment rates, consumer sentiment, and whether specific sectors face regulatory crackdowns or policy support, Fong noted.
The remarks came amid rising concerns over Chinese stock market transparency, as the Shanghai and Shenzhen exchanges from Monday onwards halted daily disclosure of foreign inflows into onshore equities, or northbound trades from Hong Kong via the Stock Connect, amid persistent foreign capital outflows.
Instead, information on foreign stock holdings will be available on a quarterly basis.
Although institutional interest persists, allocations have shifted to markets with higher rates or better stock performance.
“I do believe some investors think China is a place for diversification. They may move some money from, for example, US, Europe or Japan, if they want to diversify or look for something cheaper,” Fong said.
Currently, both Hong Kong and onshore Chinese equities are trading at historically low valuations. “But it's still too early to tell. Because lots of investors would like to see some concrete recovery or bottoming of economic data before they jump in,” he added.
GLOBAL REALLOCATION
Fong believes that the Federal Reserve's anticipated rate cuts could benefit both Hong Kong and onshore Chinese equities.
Lower rates typically weaken the US dollar, easing pressure on the renminbi and narrowing the interest rate gap between the two countries, which could potentially stabilise outflows, he explained.
A more resilient renminbi and stabilised outflows might encourage Beijing to implement additional stimulus measures, he added.
As rates fall, the trillions of dollars currently parked in high-yield instruments like deposits and money funds may shift in search of better returns, potentially triggering a global asset reallocation that could benefit the Chinese equities market, Fong said. He noted that Hong Kong stocks offering over 7% dividend yields are readily available.
“But we still have a lot of uncertainty on how fast the interest rate is going to come down. If it comes down fairly slowly, then this reallocation of assets may take longer,” he said.
As China is in a different rate cycle compared to most major markets, David Perrett, co-head of Asia Pacific equities at M&G Investments said institutional investors should avoid tying the market to global themes such as artificial intelligence when it is “marching to its own beat”.
“We would see Chinese equities as relatively uncorrelated with global markets at present,” Perrett told AsianInvestor.
“The key drivers for Chinese equities are domestic economy stimulus measures and whether these policies are successful or not in helping the Chinese economy to stabilise and recover,” he said.
POLICY CLUES
BlackRock
So far, the market is still waiting for major stimulus from the central government. Most investors read summaries of the Communist Party’s July Third Plenum meeting as a lack of imminent concrete policies, resulting in a muted stock market reaction.
“We've seen lots of policy support come through. I just don't think it's been sufficient to change the macro backdrop,” said Belinda Boa, BlackRock’s head of active investments for APAC at a press conference ahead of the Plenum in mid-July.
“In the short term, we're watching what could possibly be a more positive catalyst. I think we may need to see more policy support from China…If we don't see that, I would say for now, it's more a wait-and-see,” she said.
BlackRock
BlackRock is neutral on Chinese stocks for the second half of 2024, balancing low valuations against ongoing domestic headwinds.
“We think, on the one hand, valuation by historic standards, or by comparison to international peers, seems rather low,” said Ben Powell, chief APAC and Middle East investment strategist at BlackRock Investment Institute.
“But on the other hand, the headwinds of geopolitics, property, demography, and the seeming slight lack of confidence from Chinese investors themselves are ongoing.”