Citi Private Bank is turning increasingly bullish on Greater China equities, which it believes is attracting foreign investors, on the back of successful deleveraging efforts and financial reforms by the Xi administration.
Chinese equities have largely been shunned by foreign investors since the stock market crash of 2015, which was followed by a rout in 2016, but the tides began to turn in mid-2017.
‘The trading pattern over the first week [of 2018] or so is very encouraging. Last year, even with all these gains in the China market, we didn’t see much fund inflows from global portfolio managers,’ Ken Peng, investment strategist, said at a 2018 market outlook briefing in Singapore.
‘As soon as you turn to the first week, the domestic flows are normal but there are a lot more inflows from these foreign investors.’
Lipper data shows that the performance of Chinese equity funds trounced their emerging market peers in 2017, with mainland stocks gaining nearly 22% and Hong Kong stocks gaining 36%.
According to Citywire Discovery, Greater China equity funds netted $189 million between June and October last year. In contrast, the funds lost $787 million in the first six months of 2017.
Market commentators believe that the change of heart is mainly to do with MSCI’s June decision to include A-shares in its equity indexes.
In the second half of the year, the index provider will give A-shares a 0.08% weighting in its global equity index and a 2.5% weighting in the emerging market benchmark.
‘China’s economy is 11% of the world economy, trade is at 12%, and its market cap is more than 15%. There’s no doubt in my mind that it will have 8-10% of global benchmark weighting eventually,’ Peng said.
‘So, investors should be getting in when it’s 3%, not when it’s 10%.’
Citi does not have an explicit allocation to A-shares. Instead, it has allocated to MSCI China, which includes HK listed shares, US American Depositary Receipts and a few A-shares.
It increased its China overweight in November after upgrading it from neutral in March.
‘In China now, it [regulation] has been tightened so much that you’re seeing 9% M2 growth, and you have to subtract from that the shrinkage in shadow banking activity.
'So, the amount of deleveraging is more than what the official data publishes,’ he added.
For its mid-risk portfolios without hedge funds, the private bank is recommending 10% allocation to Asia ex-Japan equities, of which one third is MSCI China.
The bank is mostly positive on Asia ex-Japan equities, with a preference for Greater China, South Korea and India. Its preferred sectors in Asia are IT and healthcare.