Written by Naomi Rovnick
LONDON (Reuters) – Global investors are preparing to bet on China again, in a major shift in sentiment sparked by Beijing’s quest to reverse an economic slowdown and revive long-term interest in its stock markets.
It’s early days, and few money managers expect a Chinese growth spurt anytime soon. But government moves to draw more cash into stocks and shake up consumer spending have strengthened the appeal of still-low Chinese corporate valuations, said investors in groups that oversee more than $1.5 trillion in client money between them.
“We will be very disciplined, but overall we feel there is more upside than downside,” said Gabriel Sachs, emerging markets portfolio manager at Aberdeen, which manages 506 billion pounds ($677 billion) in assets.
He said the group bought Chinese stocks “selectively” last week and would wait for more detailed policy plans from Beijing after some unusually frank pledges of economic support generated a sharp stock market rally in recent days.
Factory activity in China contracted for the fifth straight month and the services sector slowed sharply in September, suggesting that Beijing may need to act urgently to achieve its 5% growth target in 2024.
Peak pessimism in the past?
Long-term institutional investors mostly remained on the sidelines last week, as hedge funds pushed Chinese stocks higher to encourage a stimulus boom, data sent by Goldman Sachs strategist Scott Rubner showed.
Chinese stock holdings at mutual funds dwindled to 5.1% of portfolios, the lowest level in a decade, in late August, Rubner said.
Chinese consumer confidence has taken a hit from a real estate crisis that has its roots in President Xi Jinping’s moves to stem the growth of a pile of risky real estate debt estimated at more than $1 trillion. At the same time, tensions between the United States and China escalated.
But investors believe the tide is starting to turn after Beijing authorities promised to spend as necessary to meet the 5% growth target. They also eased some restrictions on home purchases, lowered interest rates on bank lending, and offered brokers cheap money to buy stocks.
“There is a big disconnect between what (Chinese stock) valuations say and the policy narrative improving,” said Natasha Ibtihaj of Artemis Fund Managers.
It added that it had increased its holdings of Chinese stocks in the past few days and taken some new positions.
Assembly?
Chinese stocks posted their best daily gains since 2008 on Monday, but investors cautioned against expecting more such strong moves in the short term.
“This is a technical rally driven by liquidity,” said George Efstathopoulos, a portfolio manager at Singapore-based Fidelity International, adding that it was likely caused in part by short sellers abandoning bets on falling stock prices.
“There’s probably going to be a lot of short covering, and there’s probably going to be a lot of hedge funds jumping in for short-term returns,” Aberdeen’s Sachs said.
Investors have withdrawn a net $1.4 billion from major Chinese equity funds tracked by Lipper so far in 2024, reversing all inflows from 2023, a year marked by unfulfilled hopes for increased consumer spending after strict coronavirus lockdowns ended.
Efstathopoulos said he would wait for Chinese consumer confidence to rise before buying more Chinese stocks.
Mark Tinker, chief investment officer at Toscafond Hong Kong, a hedge fund, said Beijing’s recent actions showed China may be building sustainable household demand rather than seeking rapid growth through another property or infrastructure boom.
He added: “5% growth is not worth it if all you do is encourage (more) destabilizing influence.”
Luca Paolini, chief strategist at Pictet Asset Management, which oversees more than 260 billion euros ($291 billion) of client money, said investors may have overlooked the prospect of lower U.S. interest rates boosting global demand and Chinese exports.
On September 18, the US Federal Reserve began its long-awaited monetary easing cycle with a significant interest rate cut of 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 functionality,” Paolini added.
Noel O’Halloran, chief investment officer at KBI Global Investors, said he started buying Chinese stocks this summer for valuation reasons and would not yet take profits.
“In terms of allocations to China, it is too early for a lot of people to change their allocations but I think the trend can only go in one direction, which is up.”