More and more signs indicate that the strong rebound of China's stock market is triggering a directional shift in global investment portfolios, with many overseas investors racking their brains trying to catch this trend.

According to market observers, the funds that had previously left the Chinese stock market to invest in Japan and Southeast Asian stocks are now trying to reverse course after China's latest stimulus policies. This shift actually began quietly before the holiday: South Korea, Indonesia, Malaysia, and Thailand all saw net outflows last week, while statistics from BNP Paribas show that over $20 billion has been withdrawn from the Japanese stock market in the first three weeks of September.

This new phenomenon in fund flows may indicate that chasing Chinese assets is becoming the latest trend in the Asia-Pacific and global markets. Earlier this year, the Japanese stock market surged after breaking a thirty-year high, the Indian stock market hit record highs due to accelerated economic growth, and the Southeast Asian market was also boosted after the Fed rate cut. Now, the tides have turned, and a new global market trend seems to be emerging alongside the 'dragon'...

"We are reducing long positions across Asia to free up funds for buying Chinese stocks," said Eric Yee, Senior Investment Portfolio Manager at Atlantis Investment Management in Singapore. "Everyone is doing it. This is a policy-driven strong recovery. You wouldn't want to miss such an opportunity."

With the Chinese government announcing a series of measures to stimulate economic growth last week, the MSCI China Index has risen over 30% from recent lows. Both A-shares and H-shares hit historic highs in trading volume on Monday. Some overseas investors expressed on social media using the FTSE China A50 Index futures as an example, that the Chinese stock market has wiped out 938 days of declines in just 7 days.

Hedge funds betting on China are 'raking in huge profits'.

According to insiders, the manic rally in the Chinese stock market over the past week has brought returns of over 25% to some hedge funds betting on Chinese assets.

According to reports, Triata Capital China Fund surged by 44% last month, BlueCreek China Fund achieved a high ROI of 31%, while Yunqi Capital China Fund soared by 26%. Many other funds have also gradually recovered from earlier this year's decline. Data from Eurekahedge Pte shows that with the strong rebound in A-shares, hedge funds focusing on the Chinese market have finally gained long-awaited opportunities.

The first wave of rebound last week greatly benefited hedge funds with significantly more bullish positions than bearish positions on the Chinese stock market. Many optimistically believe that careful selection of individual stocks can even outperform the market. After billionaire investor David Tepper declared he is buying all assets related to China, hedge funds rushed into Chinese stocks at a record pace.

Data shows that Goldman Sachs' hedge fund clients had the highest net purchase of Chinese stocks last week since the bank's main brokerage business began compiling relevant statistics in 2016.

According to reports, the hedge fund Mount Lucas Management from the USA has established a bullish position in China ETFs. GAO Capital from Singapore and Timefolio Asset Management from South Korea are buying Chinese blue-chip stocks. According to the latest documents from the Hong Kong Stock Exchange, JPMorgan Chase increased its holdings of Ping An Insurance H-shares by 39.861682 million shares on September 26, spending approximately 1.771 billion Hong Kong dollars, increasing its ownership to 8.28%.

French bank strategist Jason Lui and others wrote in a report on Wednesday, 'We believe some foreign investors are reducing their overweight positions in Japanese stocks and reallocating to Chinese stocks.'

It should be noted that this shift is still in its early stages. Mohit Mirpuri, the fund manager of Singapore's SGMC Capital Pte., stated, 'Although it is still early, the argument for the shift from the Japanese or Indian markets to China is compelling. The current momentum is hard to ignore.'

Despite experiencing a significant increase for over a week, the valuation of Chinese stocks is not actually considered high at the moment - even with the recent rebound, the forward P/E ratio of the MSCI China Index is only about 10.8 times, below the five-year average of 11.7 times.

Joseph Zhang Xiaogang, founder of BlueCreek China Fund, stated that the valuations in the Chinese market are still very cheap. Previously, global investors held deep negative biases towards China and its economy, and they need some time to change these biases. He predicts that the Chinese government still has many measures in its toolbox to support the economy.

According to the data as of the end of August from EPFR, the total proportion of global mutual funds in Chinese stocks is approximately 5%, the lowest level in the past decade, highlighting that many funds still have a lot of room to increase their holdings of Chinese stocks.

Research institutions DataTrek Research stated that, judging from historical experience, this round of rebound in the Chinese stock market may still have a long way to go. The institution compared the relative performance of iShares China Large-Cap ETF (FXI) and SPDR S&P 500 ETF (SPY) over a 100-day rolling time span. It found that during periods of 'positive changes in China's policies', such as in 2009, 2015, and 2023, Chinese stocks tend to outperform US stocks by 30 percentage points or more. Currently, the relative excess return is only 13 percentage points.

Nicholas Colas, co-founder of DataTrek, wrote in a client memo that from this perspective, considering the performance of Chinese stocks after previous policy changes, Chinese stocks definitely have greater upside potential compared to US large-cap stocks.

Seeing the future, why not buy!

It is worth mentioning that after the continuous sharp rise in A-shares last week, despite the ongoing Golden Week holiday in the Chinese stock market, bullish calls from overseas institutions have not ceased.

Morgan Stanley stated on Wednesday local time that if the Chinese government announces more spending measures in the coming weeks, the Chinese stock market may further rise by 10% to 15%.

"Expectations of further fiscal expansion have returned to the table, making investors view China from an inflation angle for the first time in a long time. The last time investors viewed China through this lens was actually after the beginning of last year. At that time, global investors valued the MSCI China index at around 12 times the expected PE ratio," said Laura Wang, Chief China Stock Strategist at Morgan Stanley.

The mentioned 15% upside potential is clearly not the most optimistic forecast in the current market. GaveKal Dragonomics' China-based analyst Thomas Gatley declared that if everything progresses as planned, the recent soaring surge in the Chinese stock market over the past week may just be the prelude to a 'super rebound' with the maximum increase potentially reaching 100%.

He pointed out that whether this rebound can continue is likely to depend on whether China's decision-makers can introduce a combination of monetary and fiscal stimuli that international investors are expecting. Assuming that monetary, fiscal, and direct market support policies can be implemented, it can basically ensure that the stock market will continue to rise.

In a report on Monday, Gatley shared his analysis results based on the performance of the Chinese stock market over the past 20 years. According to his statistics, since the introduction of the csi 300 index in 2005, China's stock market has experienced a total of five 'super rebounds'. In these five remarkable rebounds, only two (in 2006 and 2017) were driven by strong economic growth and rising corporate profits. The other three were driven by stimulus measures.

Gatley stated that the rebound driven by stimulus measures has seen an increase from trough to peak of about 50% to 100%. Therefore, if there is another round of such a rebound, there should still be a considerable upside. In addition, although both A-shares and H-shares have seen strong gains so far, in past super rebounds, A-shares have often outperformed H-shares.

Nicolas Amstutz, partner at Lotus Peak Capital in Singapore, also stated, 'We believe that the future environment in China is conducive to investment strategies focused on alpha.'

In the Hong Kong market, which resumed trading earlier this week, many Hong Kong stockbrokers have experienced one of the busiest periods of their careers. Francis Lun, CEO of Hong Kong’s large local brokerage firm Geo Securities, hailed the current surge in Hong Kong stocks as a 'once-in-a-century' event.

He mentioned that the current market reminds him of 2015 when a rush of bid orders triggered bull markets in Hong Kong and mainland China. Currently, the company has seen a surge in new account openings. Many of the company's customer support staff have canceled their scheduled holidays, working 24 hours a day, handling a surge in unprecedented customer inquiries.

The trading platform Tiger Brokers, which is popular among Hong Kong retail investors, also reported a 73% increase in new account openings last week.

Of course, with investors' enthusiasm running high, some sectors in the market showed signs of overheating and retraced during Thursday's trading session—Hang Seng Tech Index once fell by over 7% intraday, and the Hang Seng Index also briefly dropped by more than 4%, with some recent high-flying sectors leading the decline. However, in the afternoon, the declines quickly narrowed, undoubtedly reflecting the strong resilience of the current buying interest in the market.

Zhao Chen, Chief Global Strategist of investment research firm Alpine Macro, stated that while there are no guarantees that profit improvement and cheap valuations will necessarily lead to outstanding performance in the Chinese stock market, in the long run, buying Chinese stocks may already be a value investment!

Editor/ping