In recent years, "FOMO" has become a buzzword in the international market, standing for Fear of Missing Out, which refers to the fear of missing out on market rallies. Goldman Sachs recently released a report titled "FOMO Sentiment on the Rise," using it to describe the Chinese market.
Recently, international capital has been flowing back into China's stock market. The Hong Kong stock market saw a rare surge last week, with the Hang Seng Index rising by 8.6% over five consecutive days and the Hang Seng Tech Index rising by 12.5%. These increases are quite rare. The amount of northbound capital flowing back into A-shares this year has already exceeded the total for the whole of last year. Goldman Sachs believes that this recovery is supported by several factors — better-than-expected macro performance in the first quarter (some institutions have started to raise their real GDP growth forecasts for 2024), the "put option" protection provided by the "national team," strong performance in the fourth quarter of 2023, widespread resumption of diplomatic and commercial contacts between China and the United States, and the introduction of the "Nine National Measures."
"Hedge funds have clearly started to increase their positions in A-shares after February. Recently, it has been observed that the pace of hedge funds buying into the Japanese stock market has slowed down, and it is possible that funds will be allocated to other markets in Asia," a Singapore-based QFII fund manager told reporters. However, institutions are currently shifting their focus to the sustainability of the rebound.
Capital has clearly flowed back into Hong Kong and A-shares.
Data from the past week shows a significant trend of capital flowing back into the Chinese market. Data shows that foreign capital inflows into emerging Asian markets (excluding Japan) reached $3.2 billion last week, with A-shares increasing by $3.6 billion, Taiwan's stock market seeing a net inflow of $50 million, South Korea experiencing a net outflow of $50 million, India a net outflow of $20 million, and ASEAN a net outflow of $10 million. Over the past week, southbound capital saw a net inflow of $1.3 billion, and northbound capital a net inflow of $3.6 billion.
Overall, as of last weekend, A-shares have attracted $10 billion in northbound capital inflows this year, surpassing the $8.1 billion level for the whole of 2023, and last Friday recorded $3 billion in foreign capital inflows, the largest single-day inflow since December 2021; southbound capital continued its net buying trend for 22 consecutive trading days, which is quite rare. In terms of turnover, last week, the daily turnover of Hong Kong stocks reached the highest level since 2024, at 157 billion Hong Kong dollars (60% higher than the 52-week average level).
Fund holdings also indicate an increase in China's market. According to EPFR data, as of the end of March, the overall allocation ratio of global equity funds in the Chinese stock market was 5.2%, which is in the 1st percentile over the past 10 years and is still the lowest level in history, but it has slightly improved from 5% at the end of January; actively managed funds have reduced their underweight position in China, which is 320 basis points underweight compared to the benchmark, compared to 350 basis points in February, which is an improvement of 30 basis points. Asian and emerging market equity funds are still generally overweight in Indian and Indonesian markets.
"In the past month, our feeling from communicating with clients is that for those active funds that are still allocating to China, many funds are willing to reduce their underweight position in the Chinese market or increase their allocation. However, for funds that have already exited China or do not invest in China, there is no significant sign of a large-scale return," a strategist at an international investment bank mentioned in a recent online client meeting.
He also said that some overseas funds believe that the further upward space in the U.S. and Japanese markets is decreasing, so some of these funds are willing to reconsider the allocation opportunities in the Chinese market this year, especially some long-term funds from Southeast Asia and the Middle East have started to show interest in the Chinese market. Recently, the Nikkei index has retraced by more than 6%.
Goldman Sachs' research shows that hedge funds' net allocation to China is still at a five-year low, but it has rebounded. Starting from April, hedge funds' increased allocation to the Japanese stock market began to decline, and some funds may have shifted to other markets in Asia.Capital market governance reforms have also attracted attention. On April 12th, the new "Nine Measures" is the third set of guiding documents for the capital market issued by the State Council following the two "Nine Measures" in 2004 and 2014, emphasizing the strengthening of supervision over cash dividends of listed companies and increasing dividend yields to enhance the stability and predictability of shareholder returns. The following week, the China Securities Regulatory Commission (CSRC) announced five measures to support the development of Hong Kong's capital market, covering further expansion and improvement of the existing Shanghai-Hong Kong Stock Connect program (including ETFs, REITs, and mutual funds), encouraging more funds to flow into Chinese companies listed in Hong Kong IPOs.
Currently, the number of Hong Kong IPOs and the funds raised have dropped to a six-year and twenty-year low, respectively, and have declined by 45% compared to the peak in 2019 and by 90% compared to the peak in 2020. Some institutions believe that high-quality IPOs will help improve the supply of Hong Kong's market, especially against the backdrop of the expected increase in the threshold for domestic IPOs.
In addition, the recent market rumors about policies to stimulate the real estate sector have also boosted market sentiment. On April 29th, real estate stocks in A-shares and H-shares soared.
"We believe that the most effective policy to rescue the real estate industry is to establish a dedicated central government fund, directly obtaining funds from the central bank, to help deliver pre-sale housing," Nomura's Chief Economist for China, Lu Ting, mentioned in an email to reporters on the 29th.
Focusing on the Sustainability of the Rebound
Although sentiment has improved, the sustainability of China's economic recovery and market rebound in the future is still the most concerned issue for institutions.
Goldman Sachs believes that the durability of the market recovery will depend on several factors—considering the high base in the first quarter, the sequential growth rate of the economy in the second quarter may slow down, and the stock market tends to focus more on growth momentum rather than year-on-year growth rates; the profit growth situation of the first-quarter report is crucial; how and when the policy goals mentioned in the "Nine Measures" will be achieved; in the coming months, external factors are worth paying attention to, including the growth, inflation, and Federal Reserve's policy-making in the United States and their impact on global and emerging market stocks; the evolution of geopolitical risks is also closely watched.
High-frequency data (new housing sales, cement, excavators, and automobiles) show that the momentum of economic recovery still needs to be consolidated. Lu Ting analyzed that China's industrial profit growth turned negative, decreasing from 10.2% in January and February to -3.5% in March; new housing sales are still poor. The growth rate of new housing sales in 21 major cities surveyed by Wind Information (7-day moving average sales) was still negative from April 1st to 28th, at -42.9%, but the data slightly improved, rising from -47.0% in March. The sales growth rates in first-tier cities, second-tier cities, and lower-tier cities rose from -39.2%, -47.6%, and -53.0% to -36.6%, -45.2%, and -44.7%, respectively.
However, the advantage of valuation is still a positive factor. Goldman Sachs mentioned that although the market has recently risen, the valuation of Chinese stocks is still at a historical low, with the valuations of the MSCI China Index and the CSI 300 Index at only 9.6 times and 11.4 times, still about one standard deviation lower than the long-term average; the significant discount of Chinese stocks relative to global stocks has been reflected in recent performance, while other global markets are being impacted by the sharp drop in expectations of interest rate cuts by the Federal Reserve, the Chinese market is stable and rising, highlighting the effect of international investors maintaining participation in the Chinese stock market to diversify investment portfolio risks.
Given that this year's growth target is "about 5%" and the GDP growth rate in the first quarter has exceeded expectations, institutions such as UBS and Goldman Sachs expect the policy stance to remain neutral, focusing on implementing existing relaxation measures rather than formulating new ones.China's manufacturing Purchasing Managers' Index (PMI) unexpectedly reached a one-year high (50.8) last month, with the market widely expecting the April data to slightly retreat to 50.3, and the service industry PMI may drop to 52.2. However, the continuous rise for four consecutive months has already sent a positive signal. Institutions predict that data better than expected is expected to continue to drive the rebound of China's related indices.