Foreign funds seriously misjudged and accelerated the sell-off of Big A and Hang Seng stocks in December
Executive Summary:
Foreign fund managers sold a net $3.8 billion in mainland and Hong Kong equities last month, the most in 2023. The need for investors to redeem from equity funds, a rebalancing to deepen their underweight to China, the disappointing performance of equities in both regions last year, and a lack of optimism about measures to boost the economy all contributed to net selling. It seems that foreign analysts still lack sufficient knowledge of China's economy and China's stock market.
On January 3, 2024, Morgan Stanley published an analyst report saying that global long funds sold Chinese equities at the fastest pace in a year in December 2023 as they rushed to meet redemption demands and diversify from the world's second-largest economy.
Morgan Stanley's quantitative research team said in the Jan. 2 report that mainland and Hong Kong equities combined saw net outflows of $3.8 billion from active long fund managers last month, the most net selling month in 2023 and the third-largest monthly selling on record.
According to the report, the main reasons for the largest net selling by foreign funds in mainland China and Hong Kong in a year are:
One is that investors need to redeem from equity funds;
The second is the rebalancing of portfolio managers to deepen their underweight to China.
Third, the performance of the two stocks last year was rather disappointing for foreign funds.
Dragged down by geopolitical risks, a weaker-than-expected economic recovery and policy uncertainty, mainland and Hong Kong stocks ended 2023 as less satisfactory performers in the world's major indices. China's benchmark blue-chip CSI 300 index has fallen a deep 11% in 2023, while Hong Kong's Hang Seng index has fallen a staggering 14%. On average, global stock markets rose by more than 10%.
Fourth, we are not optimistic about the series of measures introduced in recent months aimed at boosting the economy.
Analysts said that in order to stimulate the economy, governments at all levels and departments have continuously introduced measures to ease money, lower interest rates, increase investment, and encourage consumption, but most of the measures are ultimately directed to the supply side. Oversupply and insufficient demand are the main problems of the economic recovery that is less than expected. Therefore, analysts believe that all measures to continue to stimulate the supply side will not be enough to restore market confidence. The big moves that the market has been waiting for and looking forward to to change the economic development model and increase labor income and social security levels have not appeared for a long time, making analysts confused about the prospects.
All of these reasons led to net selling.
Morgan Stanley also said in the report that after US fund managers took the lead and sold mainland and Hong Kong stocks, European fund managers are "catching up to adjust their underweighting to mainland and Hong Kong", in line with their US counterparts.
Morgan Stanley's report revealed that of the $3.8 billion outflow in December, $2 billion was attributed to investor redemptions from funds, while the rest was driven by fund managers selling mainland and Hong Kong stocks and buying stocks from other countries for rebalancing.
In 2023, Tencent Holdings, Alibaba Group Holdings, Kweichow Moutai and NetEase topped the list of foreign funds, while JD.com, Yum China Holdings and AIA had the highest number of new shares, according to Morgan Stanley.
Long-short equity funds seem to see more value in Chinese equities in December than long-only equity funds that accelerated selling.
In the final weeks of 2023, hedge funds bought Chinese stocks in large quantities because they bet on the thrill surprise and actively bought the dip, according to UBS's prime brokerage team.
After reading this Morgan Stanley report, I think that Morgan Stanley analysts still lack sufficient understanding of China's economy and China's stock market, and only see the temporary unsatisfactory performance of stock prices and stock indexes, and do not see the great development prospects and huge investment value of our A-shares and Hong Kong stocks.
The short break adjustment of China's stock market in 2023 is for more powerful growth in the future. The macroeconomic policy logic behind the stock market cannot be copied by Western economic theories. We continue to invest in the supply side because the Chinese have a thrifty tradition of earning more and spending less and saving more, which is conducive to our accumulation of investment capital, building our infrastructure 50 years ahead of schedule, increasing our manufacturing capacity from one-third of the world to two-thirds of the world, so that people all over the world cannot do without Made in China.
How can foreign analysts see the bright prospects for China's economy and the Chinese stock market?
[Author: Xu Sanlang]