Large investors slowly return to China after a year of poor performance

Chinese assets are showing signs of recovery as the government eases some COVID restrictions after one of the greatest mass protests in years. Large foreign investors are slowly returning to China after its equity markets recorded one of the worst-performing years.

Large foreign investors are returning to China

The Chinese equity market is now seeing some bullish outlook after analysts at Bank of America, City and JPMorgan upgraded their recommendations. These institutions have opined that reopening the country could improve the consumer-exposed stocks that have declined to report lucrative discounts.

Forecasts by Goldman Sachs predict 16% index returns for MSCI China and CSI300 by 2023. The Wall Street giant has recommended an overweight allocation to China’s financial markets. On the other hand, JPMorgan expects a 10% gain in MSCI China in 2023.

Morgan Stanley has also changed its forecasts for China’s equity market and upgraded its recommendations. Morgan Stanley has recommended an overweight allocation and high exposure to consumer stocks amid increased prospects of reopening.

The China equity strategist at Bank of America, Winnie Wu, has recommended internet and financial stocks, as these could make a short-term rebound.

Some investors remain cautious

While the majority of Wall Street is recommending a return to investing in China’s stock market, a section of investors is hesitating about returning to invest in the country. The best timing and the amount of capital to allocate to China is still a contentious issue amid shifting regulatory and political risks that have plagued the equity market in the last few years.

Eva Lee, the head of Greater China equities at UBS Global Wealth Management, the largest wealth management firm by assets, opines that the firm was willing to give up the 10% gains and instead wait until there is a clear pivot of the COVID policies in China.

She argued that China had had a history of changing its policies several times in 2022. Some of the most contentious policies in the country revolve around property and COVID. UBD Global Management has also given a neutral recommendation for the Chinese stock market.

The recovery in China’s equity markets is already being seen. Last week, Hang Seng gained 6% and closed its best month since 1998. There was also a 27% increase in November. The Chinese yuan is also showing signs of a recovery, posting its best week since 2005.

Investors believe that the movement in assets seen so far, despite the high COVID cases and slight hints that the country will do away with strict COVID restrictions, suggests a light positioning in China. Therefore, if there were steady inflows, the markets could go higher.

There is still a significant number of outflows from select Chinese assets. Institutional investors in the US have been reducing their exposure to US-listed Chinese American Depositary Receipts. The total outflows in the fourth quarter are estimated to reach $2.9 billion.