(Bloomberg) — Global fund managers are dialing back their long-running retreat from Chinese stocks, drawn by AI prospects and favorable valuations.
Of nearly 2,800 global funds analyzed by Bank of America, active long-only funds have, on average, moved to a “benchmark-neutral” weighting on China starting June, ending a four-year run of being “underweight,” according to its strategist Nigel Tupper. The funds collectively manage $562 billion in Chinese stocks.
The shift shows funds are encouraged by attractive valuations and improving profit outlooks in growth sectors like artificial intelligence. While it doesn’t necessarily signal a broad bullish turn, it indicates managers are largely done cutting their exposure, removing a major hurdle for the market’s recovery.
“Selling pressure is nearing a floor, shifting investor focus from positioning to earnings delivery,” Gary Tan, a portfolio manager at Allspring Global Investments, said, adding his firm is selectively adding Chinese stocks. “China does not need global investors to turn outright bullish for the market backdrop to improve; it may simply need them to stop cutting exposure.”
Other flow data point to a similar direction. Exchange-traded funds focused on China and Hong Kong drew $19 million in August after $1.94 billion of outflows in July, according to Bloomberg Intelligence’s data. Meanwhile, outflows from emerging-market funds that exclude China have been rising.
“China’s systematic ETF underweight is likely approaching a floor after the sharpest allocation reduction among major emerging markets,” said BI analyst Rebecca Sin. “The forces creating China’s underweight have started to lose momentum.”
Valuations may be helping. The MSCI China Index is trading at about 10.2 times 12-month forward earnings, below its 10-year average of 11.7 times.
Investors are also finding improving earnings in parts of the market tied to Beijing’s technology ambitions. Shanghai-listed companies posted a 17.6% rise in first-half net income, according to Shanghai Securities News, driven by tech hardware and new-economy companies even as property and consumer industries lagged.
That divergence also means China’s market recovery remains uneven. The CSI 300 has fallen about 11% this quarter, and investors remain selective about where they put money.
“You buy the future of China,” Herald van der Linde, head of equity strategy for Asia Pacific at HSBC Holdings Plc, said, citing hardware technology and biopharma as preferred sectors. Consumer industries and real estate are “the past of China.”
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