Get 40% Off
🤯 This Tech Portfolio is up 29% YTD! Join Now to Get April’s Top PicksGet The Picks – Just 99 USD

Analysis-Easing COVID-19 rules, growth focus aid China bulls' cautious return

Published 06/29/2022, 10:05 AM
Updated 06/29/2022, 07:58 PM
© Reuters. FILE PHOTO: A woman walks by an electronic display showing the Shenzhen and Hang Seng stock indexes, in Shanghai, China, September 24, 2021. REUTERS/Aly Song

© Reuters. FILE PHOTO: A woman walks by an electronic display showing the Shenzhen and Hang Seng stock indexes, in Shanghai, China, September 24, 2021. REUTERS/Aly Song

By Xie Yu

HONG KONG (Reuters) - The latest easing of coronavirus travel rules combined with other encouraging policy signals have began luring some foreign investors back to Chinese stocks, raising the chances that the market can sustain its bounce after months of heavy selling.

As the S&P 500 is about to close its worst first half of any year since 1970 and bonds have taken a thrashing, China's beaten-down equity markets start looking like a shelter from a global storm of runaway inflation, interest rate hikes, and recession fears.

China's blue-chip CSI300 index is up about 20% from April lows, as is the Shanghai Composite after losses of more than 10% in the first quarter.

The gains, together with the relaxation of lockdowns and signals that Beijing could ease up both on virus policies and regulatory clampdowns, have tempted money managers, who were quitting China en-masse in March, to return.

Those who were on the sidelines, "have shown some increase in appetite for China in the past few weeks," said Elizabeth Kwik, investment director of Asian equities at British asset manager abrdn. "Some have chosen to add to their position."

Foreign investors bought a net 74.6 billion yuan ($11 billion) worth of China-listed shares in June so far, which is set to be the biggest monthly inflow this year, according to data from Refinitiv Eikon.

(Graphics: https://graphics.reuters.com/GLOBAL-MARKETS/jnvwezddnvw/chart.png)

This week, travel and gambling stocks leapt as China halved travellers' quarantine to one week.

Investors hope it is a sign Beijing could eventually ease its draconian zero COVID-19 policy, and authorities are making efforts to come good on promises to support the world's second-biggest economy.

"COVID zero policy has been mentioned as the biggest hurdle facing investors as they look to understand China's current policy focus," Morgan Stanley (NYSE:MS) analysts said in a Wednesday report. "These latest developments will help rebuild investor confidence that economic growth is being prioritised."

Unlike the rest of the world, China has no inflation problem.

Coronavirus COVID curbs and the absence of massive consumption-focused stimulus have kept demand soft and put a lid on prices - allowing the central bank to ease policy while most of its peers keep tightening.

Senior officials have also vowed to support capital markets and growth and have eased a crackdown on once-hot sectors such as technology.

Shares in e-commerce giant Alibaba (NYSE:BABA), which were pounded through 2020 and 2021, have rallied 60% from a record low in March.

J.P. Morgan analysts last Friday advised clients to add to positions in China directly, a shift from earlier advice to keep indirect exposure via commodities or other markets.

PARING LOSSES

The market rebound is also helping improve the performance of regional funds that stayed invested last year and through March, when Western sanctions on Russia stoked fears China could also become a target.

A Eurekahedge index tracking Greater China-focused hedge funds with long-short strategies gained 1.1% in May, after losing 13.6% in the first four months of 2022.

Anatole Investment Management Ltd, a Hong Kong-based firm managing around $1.9 billion with its flagship fund, saw monthly returns turn positive for May and extend in June after a 22% drop in the first four months, people familiar with its performance said. They requested anonymity because they are not authorised to speak publicly. That was partly due to bets on Chinese internet firms after Chinese authorities, concerned about markets, signaled willingness to wind down a regulatory crackdown of nearly two years.

When contacted by Reuters, the fund described this month's expansion as significant and said Greater China remained its biggest exposure.

Aspex Management, which manages around $7 billion, reported positive returns in April and May, according to documents seen by Reuters, trimming losses for the first five months of the year to 14.4%. Aspex did not respond to queries.

RESET

There are still reasons to be cautious and June's $11 billion in equity inflows are modest against a tide that saw roughly $50 billion in outflows from stocks and bonds over the first quarter, according to the Institute of International Finance.

Investors worry Western sanctions on Russia could serve as a blueprint for China, while the health of the property market, once its growth engine, has been a concern ever since developer China Evergrande defaulted on some debts last year.

State Street (NYSE:STT) Global Markets Yuting Shao said the firm had not returned to overweight on Chinese stocks, while Ewan Markson-Brown a fund manager at CRUX Asset Management was avoiding anything to do with real estate.

"The property market is still a big issue," he said.

Still, money is flowing again and sentiment has shifted.

The 20 biggest open-ended and exchange-traded funds traded in Hong Kong with Greater China equities strategy all reported positive returns last month and 17 of them grew their assets in May, according to Morningstar data.

Paul O'Connor, head of the multi-asset team at Janus Henderson in London, said China has had its "capitulation" and now it was its chance to outperform.

© Reuters. FILE PHOTO: A woman walks by an electronic display showing the Shenzhen and Hang Seng stock indexes, in Shanghai, China, September 24, 2021. REUTERS/Aly Song

"They have had a valuation reset and they don't have the policy headwinds we have in other places where central banks are draining liquidity and putting up interest rates."

($1 = 6.7025 Chinese yuan renminbi)

Latest comments

Risk Disclosure: Trading in financial instruments and/or cryptocurrencies involves high risks including the risk of losing some, or all, of your investment amount, and may not be suitable for all investors. Prices of cryptocurrencies are extremely volatile and may be affected by external factors such as financial, regulatory or political events. Trading on margin increases the financial risks.
Before deciding to trade in financial instrument or cryptocurrencies you should be fully informed of the risks and costs associated with trading the financial markets, carefully consider your investment objectives, level of experience, and risk appetite, and seek professional advice where needed.
Fusion Media would like to remind you that the data contained in this website is not necessarily real-time nor accurate. The data and prices on the website are not necessarily provided by any market or exchange, but may be provided by market makers, and so prices may not be accurate and may differ from the actual price at any given market, meaning prices are indicative and not appropriate for trading purposes. Fusion Media and any provider of the data contained in this website will not accept liability for any loss or damage as a result of your trading, or your reliance on the information contained within this website.
It is prohibited to use, store, reproduce, display, modify, transmit or distribute the data contained in this website without the explicit prior written permission of Fusion Media and/or the data provider. All intellectual property rights are reserved by the providers and/or the exchange providing the data contained in this website.
Fusion Media may be compensated by the advertisers that appear on the website, based on your interaction with the advertisements or advertisers.
© 2007-2024 - Fusion Media Limited. All Rights Reserved.