Hope Rises For China's Stock Market As Global Investors Expect Market Recovery

Two international funds that have been cautious about Chinese equities have turned bullish, citing attractive valuations and improving earnings. This shift in sentiment could signal a broader recovery in investor confidence in the Chinese stock market.

What Happened: Norway’s Skagen AS and its U.S. counterpart, Boston Partners, have increased their investments in Chinese stocks listed in mainland China and Hong Kong. They attribute this move to the low valuations, reduced financial and regulatory risks, and improved earnings, reported Bloomberg.

These funds’ renewed optimism, alongside their peers like abrdn plc and M&G Investment Management, suggests that the recent strong performance of Chinese stocks may be sustainable. This also indicates a growing confidence among global investors in Beijing’s efforts to address the $7 trillion market slump and its measured approach to stimulating growth.

“Investors are demanding higher compensation for holding Chinese stocks due to the economy's structural challenges, but the stance is also driven by "flows, fears, and misunderstandings," said Fredrik Bjelland, portfolio manager of the $1.4 billion Skagen Kon-Tiki emerging-market fund.

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Skagen has increased its holdings in mainland Chinese and Hong Kong stocks to 32% of its emerging-market portfolio, up from 28% in September. This is only the second time in the fund’s 22-year history that it has gone overweight in China. The fund has outperformed 87% of its peers in 2023 and 91% so far this year.

David Kim, overseeing approximately $180 million in assets at Boston Partners, noted that the firm’s holdings of mainland Chinese and Hong Kong equities surged to 47.5% of its emerging-market portfolio by February’s end, marking a twofold increase from six months prior. Last year, his long-only Boston Partners Emerging Markets Fund outperformed 85% of its peers.

Kim mentioned that he has been increasing his positions in e-commerce giant JD.com, pointing to its favorable earnings momentum despite a forward price-to-earnings ratio of less than 10 times. Additionally, he made a wager on Longfor Group Holdings, highlighting that the developer’s non-residential properties were undervalued. "We were seeing pockets of strength in earnings reports," he said.

Why It Matters: The recent shift in sentiment towards Chinese stocks is in line with the observations of industry experts. Jason Hsu, the chairman and chief investment officer of Rayliant Global Advisors, previously noted that the low valuation of Chinese stocks presents an attractive investment opportunity.

Similarly, Shaun Rein, the founder and managing director of the China Market Research Group, highlighted that the current stock valuations in China are unjustly low. He advised investors to consider re-entering the Chinese market cautiously.

However, amid these positive signs, Chinese investors are seeking refuge offshore due to domestic market fears. This shift in investment strategy adds a new layer of complexity to Beijing’s efforts to stabilize the local markets and the yuan.

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