As investors scramble to seize new opportunities, China’s stock market surge is shaking up global portfolios. Market analysts say that with China rolling out aggressive economic stimulus, funds that previously favored Japanese and Southeast Asian stocks are now reversing course.
Investors Flock to China as Stock Market Surges
Stocks in markets like South Korea, Indonesia, Malaysia, and Thailand have seen net outflows. BNP Paribas even reported that over $20 billion has flowed out of Japan’s stock market in just the first few weeks of September.
This shift could signal the end of strong performances for Asian markets outside of China. Earlier this year, India’s stock market soared on accelerating economic growth, and Southeast Asia was boosted by U.S. interest rate cuts, which helped regional markets. But now, with the Chinese government rolling out pro-growth policies, the country’s stock market recovery is stealing attention from these markets.
Eric Yee, a senior portfolio manager at Atlantis Investment Management, confirmed this trend in a report:
“We’re cutting long positions across Asia to fund our purchases in China’s stock market. Everyone’s doing it. It’s a solid recovery driven by policy. You don’t want to miss out on this.”
Following a series of economic stimulus measures by the Chinese government, the MSCI China Index has soared more than 30% from its recent low.
Earlier this week, trading volumes in both China and Hong Kong hit record highs. Despite the rally, valuations remain attractive, with the MSCI China Index’s forward P/E ratio at 10.8x—still below its five-year average of 11.7x. This leaves room for further gains, especially considering that global mutual funds currently have just a 5% allocation in Chinese stocks, according to August data—the lowest in a decade.
Is China’s Stock Rally Sustainable?
As investors reallocate resources, it’s becoming clearer that more money could flow into China. While the shift into Chinese stocks is still in its early stages, BNP Paribas strategists, including Jason Lui, pointed out that investors are already trimming their exposure to Japanese stocks and reallocating funds back to China. Although this trend hasn’t yet led to significant outflows from India and other emerging markets, larger shifts could still happen.
Despite the strong performance, analysts remain divided on China’s stock market outlook. Maybank analyst Jeffrosenberg Chenlim cautioned that the current capital flow might just be a “flash in the pan,” not a long-term trend. On Thursday, China-listed stocks in Hong Kong saw their biggest drop—down 4.9%—in 13 days, which raised concerns among some market watchers.
But others, like SGMC Capital fund manager Mohit Mirpuri, believe that by the end of 2024, China could be the best-performing market. The momentum right now is hard to ignore, and China’s economy still has strong growth potential.
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