Global investors are buying China and betting last month's rally has legs, but few are willing to go large until there are far more concrete signs that the economy and earnings will improve.
The sentiment shift has been fast and furious, spurring billions of investor cash that had been diverted to India and Japan rushing back to bring China exposures from near record lows towards neutral or market-weight.
In just a month, the proportion of Asia fund managers building exposure in China jumped from 8% to 31%, according to a Bank of America survey published in mid-October, and the percentage of managers looking outside China for opportunities collapsed by a similar margin.
Yet markets have already pulled back 10% from the rally's highs thus far and third-quarter gross domestic product data on Friday showed the economy grew at the slowest pace since early 2023, leaving investors preparing to wait it out.
"The real crux of a second-leg higher in shares is if the government is able to stimulate consumer demand," said Willem Sels, global chief investment officer at HSBC Global Private Banking and Wealth.
"We think there will be more details coming through and the market is looking for a number on the size of fiscal stimulus to get excited. If we get that, then there is more room for another rise in stocks. We are still neutral."
China no longer publishes timely data showing money moving in and out of its equity markets but ebbing turnover and momentum point to investors giving the latest stimulus efforts the benefit of the doubt.
Cash that poured into U.S.-listed exchange-traded funds that invest in China has mostly stayed there, after the initial rush.
"People are still observing - there's no immediate profit-taking positions," said Henry Wu, head of Xtrackers U.S. products at DWS in New York, where the Xtrackers Harvest CSI 300 has drawn more than $2.2 billion in inflows since late September. "Investors are here to wait and see."
'BETTER LATE THAN WRONG'
Foreigners say that tech and e-commerce companies are attractive, with the latter exposed to improvement in consumption and offering a margin of safety in being both relatively cheap and generating a lot of cash.
"They were penalised for several years both for reality and perception reasons about government policies and regulations," said Nate Thooft, CIO for multi-asset at Manulife Investment Management.
"But our impression is that this time around China policymakerswant to help the market, and I think they're going to be less restrictive and ... some of the gap in valuation between equivalent country companies in the tech space could close."
Most are leaving real estate, where one-time powerhouse developers are cheap and swing wildly, to bolder speculators.
To be sure, there are plenty of investors wary of geopolitical risks or China's regulatory rollercoaster who have walked away from the mainland markets for good and others who are sceptical about how strongly the economy can rebound.
Still, the mood has moved from aversion to China's stock market to watching, waiting, and gradually buying.
"We are not speculators, we are building an investment case," said Benjamin Melman, chief investment officer at Edmond de Rothschild Asset Management, which has held a neutral position on China for more than a year.
"It is better to be late than wrong."
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