The pace of global financial markets is undergoing rapid transformation, with recent shifts in investor sentiment signaling an unexpected turn towards optimism regarding the Chinese stock marketFor many international investors, the past week has seen a noticeable shift in attitudes, marked by a significant uptick in purchasing activities in Chinese equitiesAccording to data released by Goldman Sachs' prime brokerage, the net buying activity from foreign investors reached a peak not seen since March 2021, just on September 24. Scott Rubner, the managing director and tactical strategist at Goldman Sachs Global Markets, highlighted that the majority of these transactions were driven by bullish sentiment, making for an impressive resurgence in investment flows into China.

The following day, the momentum seemed to persist, pointing to a continued appetite for long positions within the market

Advertisements

Accurate figures from Goldman Sachs indicated that as of September 26, foreign investment had experienced net inflows over eight consecutive trading daysRubner postulated that the driving forces behind this renewed interest were macro funds, quant traders, and investing funds leaning heavily towards short-term trading strategiesIt becomes apparent that an environment of bullish sentiment is fostered against a backdrop where foreign allocation to Chinese stocks remains considerably low, providing ample room for reinvestment.

A fascinating statistic from Rubner's analysis showcased that as of the end of August, the allocation of global mutual funds (public funds) towards Chinese equities was a mere 5.1%. This figure marked a record low over the past decade, placing it firmly in the first percentile of allocation metricsWhen considering asset-weighted figures, the allocation for actively managed public funds remains lagging by 310 basis points when juxtaposed with benchmark indexes

Advertisements

Interestingly, hedge fund net exposures in China hovered near the 14th percentile of the past five years, highlighting a concerning underexposure to the Chinese market amongst this class of investors.

Interviews conducted with select overseas fund managers reveal that while some had already fully committed their capital, others were still contemplating their purchasing decisionsThis reflects a caution informed by the broader investment landscape, wherein many participants are now keenly awaiting the impact of forthcoming policy announcements from China.

Goldman Sachs has offered projections regarding future policy directions, suggesting a wave of expected support from the People's Bank of ChinaThey anticipate that measures previously signaled will gradually materialize, with expectations that additional easing mechanisms will emerge both within this year and into the nextRegarding monetary policy, Goldman has predicted a potential reduction of the reserve requirement ratio by 25 basis points in the fourth quarter

Advertisements

This prediction is predicated on the possibility that if the Federal Reserve adopts a more aggressive stance in lowering policy rates in the coming months, it would embolden the PBOC to follow suit.

Furthermore, in considering fiscal policy, there is a forecast of additional government bonds being issued to support fiscal expenditures, beyond what is already budgeted for this yearThis could involve the approval of extra long-term sovereign bonds or adjustments to increase the official fiscal deficit, utilizing unissued bond quotas accumulated in prior yearsAccording to Goldman’s estimates, by year-end 2023, around 2.2 trillion renminbi in unutilized bond quotas will be available, 800 billion of which pertains to the central government, while 1.4 trillion is allocated for local governments.

On the consumer front, Goldman is also optimistic about the potential for increased fiscal support related to exchange programs for old consumer goods and new equipment upgrades

• The Drivers Behind the US Stock Market Rally
• Lithium Battery Supply Chain Starts to Rise in Price
• Leveraged Funds Drive Rise in Nearly 4,700 Stocks
• Canada's Inflation Rate Eases
• Neglected U.S. Employment Data

There’s growing anticipation for measures aimed directly at enhancing social welfare for lower-income groups, thereby addressing income inequality and supporting consumer spending.

Understanding the context, one private equity executive managing hundreds of billions shares insight that the psychological signals from policies often hold as much weight as the policies themselvesHe notes that while investors may fret over the specifics of execution or the policies in and of themselves, the timing and the predominant signals often outweigh granular details in importance.

Adding to the discourse, Steven Luk, CEO of Hong Kong-based asset management firm Fangying Research and Investment, described this recent policy shift as markedly different from prior practicesHe points out that the prior sentiments held by overseas investors were layered in a degree of pessimismEven small positive surprises in this environment have the potential to catalyze market movement

He stresses that both hedge funds and traditional mutual funds are under-allocated to ChinaAs the year ends, if markets continue their upward trajectory, these funds may find themselves compelled to adjust their allocations or risk underperforming.

Interestingly, as Luk indicated, many of these investors have not increased or decreased their holdings simply because they are already fully investedHe mentioned that clients are currently absorbing these new policies, with some awaiting clarity on their effectiveness and timingHe underscores the relatively low global expectations around China, making any favorable policy developments readily capable of igniting market enthusiasm.

In echoing sentiment, Yao Hongyao, the head of China equities at Aberdeen, described the latest measures as unique and encouraging; not only do they support economic stability, but they also provide market liquidity at a time when the Federal Reserve is expected to enter a cycle of rate cuts, which will contribute to alleviating monetary and fiscal pressures across various emerging markets—including China

The forecast for counter-cyclical adjustments, including proposed actions aimed at revitalizing the real estate sector and promoting private enterprise growth, adds excitement to the investment climate.

Furthermore, he noted a stark disconnect between the valuations of Chinese stocks and their corporate earnings, indicating a significant opportunity for investment, especially as liquidity begins to flow back into the market supported by the central bank's announced initiatives for swaps and repurchase policiesGiven the historical comparisons and evaluations, Chinese equities appear undervalued, suggesting a space ripe for substantial re-evaluation from current market participants.

The current environment thus offers an opportune moment for investors to gradually enhance their allocation towards quality Chinese assetsAberdeens focus revolves around companies capable of capturing market share both domestically and internationally, displaying a predictable earnings trajectory and able to enhance shareholder returns through repurchases and dividend distributions

The critical question arises: Have Chinese stocks quietly embarked on a prolonged bull market?

An executive from a foreign institution with a focus on China remarked on the underlying catalyst potential present within the current positionsGiven the magnitude of the stimulus measures in place, significant movements in the market could occur as large funds reassess their strategy under current conditionsShe recounted, “We are witnessing buying across the board.”

As investors align their strategies with the evolving landscape, queries surrounding the sustainability of a budding bull market echo through the corridors of investment firmsThe founder of Singapore-based APS, who has recently fielded inquiries regarding the implications of an emerging sustained bull run, stated that while the Qualified Foreign Institutional Investor processes typically extend over longer periods, there is emerging optimism