Zhitong Financial APP learned that the latest statistics show that foreign funds have increased their holdings of China's A-share market stocks for three consecutive months, of which the net inflow of northbound funds through Hong Kong in April was as high as 6 billion yuan. In the view of these foreign buyers, the recent very positive policy tone may significantly boost the risk appetite of the A-share market after the Labor Day holiday. Wall Street banks Goldman Sachs and Bank of America recently said that with the continuous depreciation of yen assets and the attractiveness of the valuation of Hong Kong A-shares, global funds may begin to reverse the strategy of "buying Japanese stocks and selling Hong Kong stocks" and re-flow into Hong Kong A-shares, mainly because of the advantageous valuation and low position of Hong Kong A-shares, which can be used as a hedging tool.
Statistics show that in April this year, overseas institutional investors such as Wall Street asset managers increased their holdings of onshore A-shares by about 6 billion yuan (about US$829 million) through trading links with Hong Kong, setting a record for the longest monthly net buying since March 2023.
While the size of the inflow could have been negative had it not been for the record number of consecutive days of buying that began last Thursday, the influx of foreign investors is likely to continue in May after government signalled further steps to support the weak property market and the depreciation of the yen prompted Wall Street to sell Japanese stocks in favor of lower-valued Hong Kong stocks and A-shares.
The CSI 300 Index, one of the benchmark A-share indexes, closed up 1.9% in April, marking three consecutive months of gains. A-shares will open next Monday after the Labor Day holiday.
Wall Street bank Goldman Sachs shouted that A-share valuation is expected to expand by 40%
Goldman Sachs, a major Wall Street bank, said that due to the widening valuation gap between the Japanese stock market and Hong Kong A-shares and the shrinkage of Japanese assets due to the depreciation of the yen, global fund managers may be starting to unwind their popular "long Japanese stocks, short Hong Kong stocks" trading, and then turn to long Hong Kong A-shares. Many macro-focused hedge funds have begun selling Japanese stocks, and some pure-long funds may also turn to Hong Kong as valuations look high in Japanese and U.S. equities, Goldman Sachs equity salespeople wrote in a trading note released on Friday.
Bank of America, another major Wall Street bank, recently said that funds continue to withdraw or rebalance from crowded transactions such as Japanese and U.S. stock markets to re-enter the Chinese market as the Federal Reserve is likely to keep its benchmark interest rate high for a longer timeframe. BofA said that China's stock market appears to be a safe-haven tool with low valuations, light positions and low correlation; In terms of fundamentals, China's macro data unexpectedly improved in the first quarter, with optimistic export growth and a recovery in domestic consumption.
The depreciation of the yen, as well as the high valuation of the Japanese stock market, are also important factors in the recent withdrawal of international capital from the Japanese stock market. The accelerated pace of yen depreciation in the past two weeks has caused international funds to shrink the value of yen-denominated assets in Japan, which in turn has led them to withdraw funds from the already high valuation of the Japanese stock market and invest in the much cheaper Hong Kong and A-share markets. At least by some valuation measures, the Hong Kong stock market is much cheaper than the Japanese stock market. The Hang Seng Index is trading at an expected P/E ratio of 8.5x, while the Nikkei 225 Index is trading at an expected P/E ratio of over 21x.
Japanese stocks have retreated sharply in recent weeks after a world-leading rally in the first quarter. The Nikkei 225 narrowly avoided a technical correction, rising as much as 22% when it hit a record high in March, but has shrunk to 14% year-to-date as Japanese stocks plunged in April on expectations of interest rate cuts and a weaker yen. Meanwhile, the Hang Seng Index was the best-performing major global stock index in April, rising more than 7%. The rebound in Hong Kong stocks was driven by policy support from the China Securities Regulatory Commission (CSRC), capital inflows from the Mainland, and the attractiveness of the Hong Kong dollar to overseas investors.
On Tuesday, Goldman Sachs analysts wrote in a note that if China's stock market can narrow the gap with the world's leading stock markets in terms of dividends, share buybacks, corporate governance and institutional ownership after a comprehensive overhaul, the overall valuation of the A-share market, which is traded in yuan, could rise by about 40% in the most optimistic scenario. Overall, Goldman Sachs believes that risk appetite in the A-share market may strengthen in the near term, and the trading environment will be more favorable.
Goldman Sachs said in the report: "If the necessary policy reform actions become a reality, the untapped reform/policy upside appears to be important for Chinese equities even in a difficult economic growth environment." "These changes suggest that risk appetite for A-shares may be stronger and the trading environment more favourable in the near term. ”
In the most basic scenario, if the reform measures can help China's A-share market catch up with the global or regional average, the valuation of China's stock market, i.e., A-shares, will expand by about 20%, and in the most optimistic scenario, A-share valuations could rise by about 40%.
Data shows that China's listed companies lag behind their global peers in terms of corporate governance and returns to smaller investors. According to Goldman Sachs, China-listed companies now pay an average of 33% of their corporate profits into dividends, while in the past 10 years, European and Japanese companies have paid 60% and 50% dividends, respectively.
The data also shows that share buybacks by China-listed companies amounted to just 0.3% of the total market capitalization last year, while the overall share buybacks of S&P 500 companies over the past 10 years have been equivalent to 2.7% of the average total market capitalization of the S&P 500.
UBS Upgrades MSCI China Index and Hong Kong Stocks to 'Overweight'
UBS Group, another major bank, has also recently joined the bullish bandwagon on Chinese equities, upgrading its recommendation rating for the entire Hong Kong stock market and upgrading to "overweight" the MSCI China Index, a benchmark index for overseas investors that includes core Chinese equity assets such as Alibaba, Tencent and Kweichow Moutai. The MSCI index tracks 704 Chinese companies with a combined market capitalization of $1.8 trillion.
UBS upgraded the MSCI China Index and Hong Kong stocks to "overweight" last week, citing corporate earnings resilience and strong policy support. In August last year, UBS downgraded the overall rating of China's stock market, which includes A-shares and Hong Kong stocks, to "neutral".
UBS equity market strategists, including Sunil Tirumalai, wrote in their latest emerging market strategy analysis on Tuesday that the largest constituents in the MSCI China index have generally performed well in terms of earnings and fundamentals. UBS also downgraded markets with large tech weights, such as Taiwan and South Korea, to "neutral".
The MSCI China Index's overall EPS has fallen by only about 2% over the past 18 months, outperforming other emerging market equity benchmarks – down about 8%, according to UBS's preferred index-weighted earnings per share (EPS) methodology.
The report notes that UBS is now more optimistic about the earnings outlook given the early signs of a rebound in consumption, believing that household savings are expected to translate into consumption and eventually flow into the market.
UBS said that the prevailing earnings per share are distorted by the sum of the free floats, and in this case, some companies have a small percentage of the index but have a lot of influence in terms of earnings per share.
Sunil Tirumalai, strategist at UBS, said: "The largest stocks in the MSCI China Index have generally performed well in terms of earnings and fundamentals. "What makes us even more optimistic about corporate earnings now is the early signs of a rebound in consumption, as evidenced by the strong year-to-date holiday spending data and the outperformance of listed consumer stocks over overall consumption in the economy. ”