China’s sudden stock rally is pulling money out of the rest of Asia

(Bloomberg) — A strong rally in Chinese stocks will trigger a shift in global portfolios as some investors rush to catch the growth.

Bloomberg’s most read

A wave of money that earlier dumped Chinese stocks in favor of Japanese and Southeast Asian stocks is about to reverse course after Beijing’s latest stimulus blitz, according to market watchers. The shift is already underway: stocks in South Korea, Indonesia, Malaysia and Thailand posted net outflows last week, while BNP Paribas SA said more than $20 billion had been pulled from Japanese stocks in the first three weeks of of September.

The emerging turnaround could signal the end of a stellar run for Asian ex-China stocks, which had previously benefited as money managers sought better returns outside the world’s second-largest stock market. For much of this year, Taiwanese stocks have received a boost as chipmakers have rallied, while Indian stocks have rallied amid accelerating economic growth. Southeast Asian markets were lifted by lower US interest rates.

“We are reducing our long positions in Asia to fund the acquisitions in China,” said Eric Yee, senior portfolio manager at Atlantis Investment Management in Singapore. “Everybody does that. It’s a good, policy-driven recovery from the bottom. You wouldn’t want to miss an opportunity like this.”

The MSCI China index rose more than 30 percent from a recent low as authorities announced a flurry of measures to revive growth. Trade turnover in both China and Hong Kong hit record highs on Monday.

Attractive valuations also helped. Even with the recent rally, the MSCI China gauge still trades at 10.8 times forward earnings, below its five-year average of 11.7 times.

Mutual funds around the world have a 5% allocation to Chinese stocks in total, the lowest level in a decade, according to EPFR data as of the end of August, underscoring room for funds to increase their holdings.

“We think some foreign investors are reducing their overweight to Japan and reallocating back to China,” BNP strategists including Jason Lui wrote in a note on Wednesday.

To be clear, the shift is still at an early stage and BNP notes that there has been no significant withdrawal of foreign money from India and products from emerging markets ex-China.

Some, like Jeffrosenberg Chenlim, an analyst at Maybank Investment Bank Bhd., see the flow of funds as “a temporary event.” A gauge of Hong Kong-listed Chinese shares fell as much as 4.9 percent on Thursday, snapping a 13-day winning streak.

The story continues

While it is still early days, there could be “an argument for a rotation from Japan or India to China,” said Mohit Mirpuri, a fund manager at Singapore-based SGMC Capital Pte. “China will be the standout performer through the end of 2024. The current momentum is hard to ignore.”

(Add analyst’s comment, index moves to tenth paragraph)

Bloomberg Businessweek’s most read

©2024 Bloomberg LP