HSBC research says global funds are underweight on China and Bank of America has noted the effect on market dynamics. "Without the long term anchoring investors, the H-share market becomes more volatile, driven by the ins-and-outs of 'quick money'," said Bank of America's chief China equity analyst Winnie Wu after surveying some 30 Hong Kong funds.
GAME CHANGER The investment mood reflects political discomfort in the West with China's rise. Competition with the U.S., in particular, has intensified from trade spats to strategic rivalry that has prompted export and investment bans on Chinese chipmaking and other sectors seen as militarily important. Multi-national firms are also re-making their supply chains to avoid such heavy reliance on Chinese manufacturing, trends investors say change the risk-reward calculus on the country. "Virtually from 2000 until pre-COVID, it was all a one-way bet for China," said Ashley Pittard, head of global equities at Pendal in Sydney.
"But the game has changed," he said. "They've been the manufacturing hub of the world...(but) the pendulum has shifted. It's not as clean as it used to be...it's not as easy as just throwing money at the big cap Chinese stocks." To be sure, sentiment can shift quickly and plenty of investors remain willing to invest in China and are positive on the outlook - including, for example, sell-side analysts at Morgan Stanley and other major U.S. banks. EPFR figures show allocation to China funds outside the U.S. has increased for two years and mainland markets' recent performance has also been encouraging. Since late October, when rumblings of a shift in China's COVID policy began, the CSI 300 blue chip index and the Shanghai Composite are each up more than 13% against a 6% gain for the U.S. S&P 500 over the same period. "We've come to this conclusion that the rally is maybe one half to one third of the way through. We still think there is opportunity for investors," said Robert St Clair, head of investment strategy at Fullerton Fund Management in Singapore. "The key signpost that will keep the rally going, and that’s what we're watching, is when earnings expectations start to revise upwards."
Still, others' hesitancy can be self-fulfilling, if
lacklustre flows hold back performance and fail to offer
compelling reasons for foreigners to leave their home markets.
"We're positive on China over the short term but our long
term outlook is neutral to negative," said John Pearce, chief
investment officer at Australia's A$115 billion ($75 billion)
UniSuper.
"As it's impossible to quantify geo-political risks we don't
attempt to," he said. "Our reservations about China's long-term
investment prospects are based on our outlook for returns to
capital."
($1 = 6.9024 Chinese yuan renminbi or 1.4981 Australian dollars)
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(Reporting by Tom Westbrook; Editing by Lincoln Feast)
