Overseas investors, who are making a beeline for Chinese stocks, sold shares worth a net Rs 9,897 crore on Friday, taking the tally for the past four trading sessions to Rs 37,000 crore, the most in a week. They had pumped Rs 35,575 crore into India stocks in September.
The nascent rotation may spell the end of a stellar run for Asia ex-China equities, which previously benefited as money managers hunted for better returns outside the world’s second-largest stock market, Bloomberg reported. For much of this year, Taiwan shares got a boost as chipmakers soared while Indian stocks rallied on the back of quickening economic growth. Southeast Asia’s markets were lifted by lower US interest rates. “We are trimming our long positions across Asia to fund China purchases,” Eric Yee, senior portfolio manager at Atlantis Investment Management in Singapore, told Bloomberg. “Everyone is doing so. It’s a good policy-driven recovery from rock bottom. You wouldn’t want to miss out on such opportunity.”
Renewed optimism about the world’s second-largest stock market is also spreading globally, with hedge funds selling US technology stocks and piling into mining and materials firms, Bloomberg reported. Meanwhile, iron ore spiked as investors bet that China’s efforts to ease property woes will improve demand from the world’s top consumer of the steel-making ingredient.
Amid the China euphoria among foreign investors, many think the recent resurgence of Chinese stocks will not be able to sustain.
Why the surge in Chinese equities is not convincing
Many among global fund managers and analysts don’t find the new-found potential in Chinese equities convincing enough. Invesco Ltd., JPMorgan Asset Management, HSBC Global Private Banking and Wealth, and Nomura Holdings Inc. are among those viewing the recent rebound with skepticism and waiting for Beijing to back up its stimulus pledges with real money, Bloomberg reported. Some are also concerned many stocks are already reaching overvalued levels.After the Chinese stocks skyrocketed, concerns have started emerging around overvaluation. “In the short term, sentiment could overshoot but people will go back to fundamentals,” Raymond Ma, Invesco’s chief investment officer for Hong Kong and Mainland China, told Bloomberg. “Because of this rally, some stocks have become really overvalued” and they lack a clear value proposition based on their likely earnings performance, he said.
While China equities spike is being seen as too fast too far, many also think the stimulus is too little to have a lasting corrective influence on the Chinese economy by sustaining the recovery and boosting growth. “Additional policy steps would be needed to boost economic activity and confidence,” Tai Hui, Asia Pacific chief market strategist in Hong Kong, told Bloomberg. “The policies announced so far can help to smoothen out the de-leveraging process, but the balance-sheet repairing would still need to take place.” Hui also pointed to global uncertainties that may crimp the nascent stock rally. “With the U.S. elections only a month away, many investors would argue that the U.S. view of China as an economic and geopolitical rival is a bipartisan consensus,” he said. Moreover, “foreign investors may choose to wait for economic data to bottom out and for this new policy direct to solidify,” he said.
China comeback trade is not going to last long
Is the China comeback trade the real deal? ED Yardeni of Yardeni Research thinks rotation out of India into China is not going to last long. Speaking to ET Now, Yardeni said, “I agree that a 25% increase in a week does not happen very often and the market really discounted a lot of the good news. A lot of it probably was short covering. We probably are seeing some rotation out of India and into China. But I do not think that is going to last very long because China’s problems are structural and a lot of it has to do with their rapidly aging demographic profile.”
“In addition, they have tried to offset the weakness in consumers by dumping goods in global markets and they are getting some pushback from Europe, from the United States, and other areas of the world. The Europeans responded with some tariffs on their electric vehicles coming out of China. So, the China trade is not going to last very long. The fundamental problems in the property market and underlying demographics are structural and cannot be cured with policy,” Yardeni said.
Mark Mobius, Chairman, Mobius Emerging Opportunities Fund, says while China has outperformed dramatically in the last few weeks, but there will probably be a turning point soon because it has moved up too far, too fast. So, there will probably be a correction. But India will continue its upward rise with some corrections along the way.
Rajiv Jain of Florida-based GQG Partners, known for his contrarian bet on Adani stocks after the hit last year by short-seller Hindenburg Research that melted the stocks of group companies, sees the Chinese rally as fleeting.
The latest run-up reminds Jain of the so-called “reopening trade” in late 2022, when a similar buying spree took place after China lifted Covid restrictions. That rally fizzled within a few months because the economic recovery disappointed. “How many times in the last three years have we seen these excitements” only for them to dissipate, Jain said in an interview with Bloomberg. His fund beat 92% of its peers tracked by Bloomberg over the same period. Jain, the manager of the $23 billion GQG Partners Emerging Markets Equity Fund, has kept his holdings in Chinese stocks at about 12% of the fund — roughly half of the weighting of its benchmark. “They’re basically a trade,” Jain told Bloomberg. “That’s a nice trade. But can you really invest in it for three years, five years?”
Founder and principal of hedge fund Hayman Capital Management Kyle Bass, known for his winning bet against the 2008 housing market which was immortalized in the classic book ‘The Big Short’, says investing in China over the long term is nothing short of a bad idea. Bass is still bearish on China because investing in China hasn’t paid off for the last decade, he says, noting that Chinese stocks have only posted gains for five out of the last 20 years, as per a report by Markets Insider.
“Typically, the biggest rallies are counter-trend rallies, and China’s trend has just been down for so many years,” Bass said in an interview with CNBC last week. “Investing in communism has never worked in the long run.”
“Do I think that the rally could continue? Do I think that stocks could go up more? The answer’s yes, but I equate it to picking up dimes in front of bulldozers,” he said.
Bass added: “Could a communist government goose its market a little more, make it go up? Yes, absolutely. And if you’re a trader, more power to you. If you invest in communism in the long run, you’ll lose every time.” Bass has been bearish on China for years, previously shorting the Chinese yuan before closing his position in 2019.
Sandeep Tandon of Quant Mutual Fund thinks long-term money will not shift to China from India. “Now question comes from the near term and the medium term perspective. Yes, the market has beaten down significantly, the first time they have showcased that they care actually about the market. So, money has shifted and money can shift even in the near term perspective. Whether it can be a long lasting phenomena, I do not think. I think it should ideally peak out in a quarter’s time on higher side, maybe this month itself, because it rallied sharply,” he told ET Now.
(With agency inputs)
