Source: China Fund Daily

Author: Ivan Zhao Gang

Chinese assets are once again "super attractive", with foreign capital pouring into the stock markets of the mainland and Hong Kong, with the speed and scale reaching the highest level since 2018.

For the first time in five years, active investment managers are so optimistic about the Chinese market. In the very short term, you can expect more money from active investment managers, "Steven Shen, EPFR's quantitative strategy manager, commented on the CNBC program.

Record net inflows of overseas funds into Chinese stock market hit a five-year high of optimism

In the four weeks to January 25, overseas active fund managers invested a total of $1.39 billion (about 9.5 billion yuan) in A shares, while as much as $2.16 billion (14.7 billion yuan) in the Hong Kong stock market during the same period, according to EPFR Global, a research and analysis firm. As for passive funds, data show that over the same period, a cumulative total of US $7.05 billion (about RMB 48 billion) flowed into Chinese stocks listed in the mainland, Hong Kong and the United States. The combined net inflow of the three items exceeds 70 billion RMB.

EPFR research shows that active fund managers participate in asset portfolios more actively than passive investment managers who follow the overall stock market index.

The net purchase of northbound funds also shows that Chinese assets continue to be super attractive. By the end of January, the total net inflow of northward capital reached 141.3 billion yuan, a new high in a single month.

Data from Morgan Stanley (Morgan Stanley) pointed out that as of January 25, US fund managers had bought a net $1.3 billion of US-listed Chinese stocks, the second month in a row that money had flowed so strongly into the Chinese stock market, while Pinduoduo, Baidu, Inc. and Bilibili Inc. recorded the largest inflows of US-listed Chinese stocks. Bank analysts point out that managers who are only long in the US believe that they are only just beginning to gradually increase their stake in China and expect to see a further influx of investment by the second quarter of 2023.

UBS's Office of Wealth Management Investment Director (CIO) also said that China's manufacturing purchasing managers' index (PMI) rebounded significantly in January, indicating that the Chinese economy is recovering strongly. The agency says it is bullish on Chinese stocks and emerging market stocks.

Lawrence Lok, chief financial officer of wealth management company Hywin, also said in early January that more money would return to the stock market in 2023 due to changes in China's overall economic environment, while many clients chose to avoid risks in the same period last year.

Bernstein, an asset manager, warned investors to be cautious. The company pointed out that it is difficult to say whether the "extreme" capital inflows of the past three months can continue in the next three months, and that if active investors in the United States and local investors in China do not buy, the growth of the Chinese stock market will be limited.

What are the opportunities to invest in China?

As for opportunities to invest in China, UBS Wealth Management Investment Director's Office pointed out that in the Chinese sector, pharmaceutical / medical equipment, consumer goods, Internet, transport, capital goods and materials stocks are expected to directly benefit from the reopening. Emerging market equities and US and European companies that are highly linked to Chinese spending are also expected to benefit. Emerging market bonds, Asian investment grade bonds and selected high-yield bonds, such as mainland real estate and Macau gaming issuers, commodities such as oil and industrial metals, as well as the renminbi and the Australian dollar are also likely to be winners.

Bo Meunier, portfolio manager of Wellington Investment stocks, believes that while there are risks that need to be paid attention to in investing in the Chinese stock market as with any investment, there are attractive investment opportunities for patient and discerning stock pickers.

Zhang Bo mentioned several structural investment opportunities in Chinese equity investment, such as the fact that many Chinese companies are expected to benefit from strong domestic demand related to the global energy transformation. including suppliers in the solar supply chain and participants in the electric vehicle supply chain.

At the same time, there is the area of health care. "the Chinese government is promoting the improvement of the quality of hospitals and medical services in second-and third-tier cities, which will benefit local medical device manufacturers serving the domestic market," Zhang said. "

Finally, Zhang Bo expects that industry consolidation and improved capital discipline will create investment opportunities. For example, after the completion of large-scale mergers and acquisitions in the domestic express industry, the remaining companies will be able to significantly improve their profit margins.

Xu Wei, executive director of MSCI and stock index researcher, pointed out in a research report on the gathering of comprehensive Chinese stock markets covering both onshore and offshore stocks that China's onshore A-share market is larger, less concentrated and more diversified than the offshore market. In a market downturn, China's onshore stock market has the potential to maintain balance and resilience, while offshore stocks may be more sensitive to market sentiment and industry rotation. A comprehensive set of Chinese stock opportunities covering both onshore and offshore stocks is likely to provide more diversified exposure to the Chinese economy.

Edit / phoebe