Fund managers are increasing their investments in China's industrial companies while maintaining their holdings in technology stocks. This strategy reflects a belief that the current two-year stock market rally has the potential to continue, even in the face of challenging economic conditions. Cheaper valuations and consistent returns are attracting foreign investors back to Chinese markets.
China's CSI300 benchmark index has achieved gains of approximately 16% year-to-date, mirroring the performance of the S&P 500. Concurrently, Hong Kong's Hang Seng index has risen by about 30%, positioning it for its strongest annual performance since 2017.
The current market sentiment stands in stark contrast to the enthusiasm seen last year, which was fueled by government stimulus announcements. Recent market volatility, notably issues with property developer China Vanke, serves as a reminder of the ongoing challenges posed by the prolonged real estate slump.
Foreign Investment Returns to Chinese Markets
Chinese equities have experienced an upward trend despite ongoing trade friction with the United States. This growth is supported by government backing, improvements in corporate management practices, and significant gains in stocks associated with artificial intelligence, particularly following the release of DeepSeek's chatbot. A record inflow of HK$1.38 trillion, equivalent to $177 billion, from mainland China into Hong Kong has helped revitalize these capital markets.
Xia Fengguang, a fund manager at Shenzhen Rongzhi Investment, stated that the next phase of growth is likely to be driven by fundamental business improvements and earnings expansion. He expressed support for Beijing's initiatives to address industrial overcapacity and detrimental price competition, a movement known as the anti-involution campaign, anticipating that these efforts will lead to improved company profit margins.
Industrial Stocks Attract Investment Interest
The valuations of industrial companies are proving attractive to fund managers, drawing significant investment interest.
Recent capital flows illustrate this trend. Over a three-month period, 13.5 billion yuan, approximately $1.91 billion, was invested in exchange-traded funds tracking the CSI Battery Thematic Index. An additional 11.2 billion yuan was directed into funds focused on the CSI chemicals sub-industry index. In contrast, funds tracking the tech-heavy STAR 50 Index experienced outflows of 31.1 billion yuan during the same timeframe.
Xu Jie, a fund manager at Shanghai-based Yuanzi Investment Management, has been investing in solar energy, steel-making, and coal companies. Xu expressed confidence that the gradual bull market will extend into the following year, citing potential inflows from both foreign and domestic investors.
Currently, both the Shanghai Composite Index and Hong Kong's Hang Seng index are trading at approximately 12 times earnings. This valuation is considerably lower when compared to the S&P 500's 28 times earnings, Japan's Nikkei 225 at 21 times earnings, and Europe's FTSE 100 Index also at 21 times earnings.
Investor Caution Persists Amidst Market Dynamics
Foreign investors had previously expressed concerns regarding policy uncertainty in China, leading them to maintain smaller positions in the market while American and global investments performed strongly. A degree of caution remains, particularly as factory activity has seen a decline for eight consecutive months leading up to October.
"When I say China, we're on the fence," remarked Vincenzo Vedda, global chief investment officer at DWS, as reported by Reuters.
China has ceased the publication of real-time foreign investment data. The most recent figures from the central bank indicate that foreign ownership stood at 3.5 trillion yuan at the end of September. While this figure is below the peak of 3.9 trillion yuan recorded in 2021, it does show some signs of recovery.
Florian Neto, head of investment for Asia at Amundi, Europe's largest asset manager, differentiates between "old China," where exporters and developers face economic headwinds, and "new China," characterized by companies in artificial intelligence and biotech poised for earnings growth. He noted, "The market, in fact, is actually driven mostly by new China, by the innovation, tech and innovative drugs… we are very, very much looking forward to adding further."