China's Resurgence: A Global Portfolio Shift Underway

As the Chinese stock market stages a strong rebound, global investors are poised to reallocate their portfolios, signaling a significant shift in the global financial landscape. This nascent rotation may mark the end of a stellar run for Asia ex-China equities, which have previously benefited from investors seeking better returns outside the world's second-largest stock market.

Unlocking China's Potential: A Timely Opportunity for Investors

The Reversal of Capital Flows

The recent surge in Chinese stocks has triggered a shift in global investment patterns, as investors rush to capitalize on the rally. A wave of money that earlier left Chinese equities in favor of stocks from Japan and Southeast Asia is now poised to reverse course, according to market watchers. This shift is already underway, with shares in South Korea, Indonesia, Malaysia, and Thailand posting net outflows last week, while BNP Paribas SA reported over $20 billion withdrawn from Japan's equities in the first three weeks of September.

The Allure of China's Policy-Driven Recovery

The Chinese market's resurgence is largely driven by Beijing's latest stimulus blitz, which has sparked a policy-driven recovery from rock bottom. As Eric Yee, a senior portfolio manager at Atlantis Investment Management in Singapore, notes, "It's a good policy-driven recovery from rock bottom. You wouldn't want to miss out on such opportunity." Investors are eager to capitalize on this opportunity, with trading turnover in both China and Hong Kong hitting a record high on Monday.

Attractive Valuations and Room for Growth

In addition to the policy-driven recovery, attractive valuations have also contributed to the appeal of Chinese equities. Even with the recent rally, the MSCI China gauge is still trading at 10.8 times forward earnings, below its five-year average of 11.7 times. Furthermore, mutual funds worldwide have a mere 5% allocation in Chinese equities in aggregate, the lowest level in a decade, according to EPFR data as of end-August, suggesting ample room for funds to boost their holdings.

The Potential for a Rotation Across Asia

The shift in global portfolios may spell the end of a stellar run for Asia ex-China equities, which have previously benefited from money managers hunting for better returns outside the world's second-largest stock market. As Mohit Mirpuri, a fund manager at Singapore-based SGMC Capital Pte, notes, "There could be an argument for a rotation out of Japan or India into China. China will be the standout performer by the end of 2024. The current momentum is hard to ignore."

The Implications for Investors

The reallocation of global capital towards Chinese equities could have far-reaching implications for investors. As Eric Yee of Atlantis Investment Management observes, "We are trimming our long positions across Asia to fund China purchases. Everyone is doing so." This shift in investment patterns may signal the end of a period of outperformance for Asia ex-China equities, as investors seek to capitalize on the resurgence of the Chinese market.In conclusion, the strong rebound in Chinese stocks is set to trigger a significant shift in global portfolios, as investors rush to catch the rally. This nascent rotation may mark the beginning of a new era in the global financial landscape, with China's policy-driven recovery and attractive valuations drawing increased attention from investors worldwide.