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Global Investors Revisit Chinese Equities After Four Years Underweight, Citing Valuations
Global active funds are increasing their allocation to Chinese equities from an underweight position, ending a four-year trend. This shift is driven by attractive valuations and AI-related opportunities, though analysts suggest it signals a halt to…
Shifting Allocations and Valuation Appeal
After years of cautious positioning, global investors are reconsidering Chinese equities. Analysts note that while this does not signal an outright bullish pivot, it marks an end to persistent selling, driven by relatively cheap valuations and opportunities within artificial intelligence.
Since June, global active long-only funds have increased their average allocation to Chinese equities to benchmark-neutral, moving away from an underweight stance. This adjustment concludes four years of underweight positioning, with these funds managing USD 562 billion in Chinese stocks, according to a recent Bank of America analysis covering 2,767 global funds.
BlackRock maintained a neutral stance on Chinese equities but identified opportunities in physical AI, as detailed in its fourth-quarter global outlook published in September. UBS Asset Management echoed this sentiment in an October 1 report, highlighting China as “a key opportunity” due to attractive valuations in technology, AI, and advanced manufacturing sectors.
Kenny Ng, a strategist at Everbright Securities International, stated that Chinese assets would likely continue attracting increased attention from global investors. He pointed to Hong Kong's relatively low valuations and elevated external uncertainties.
Risks such as persistently high US Treasury yields, growing US government debt, geopolitical tensions, and the US midterm elections could heighten market volatility. Ng suggested this makes Hong Kong and mainland Chinese equities attractive for diversification. The shift also coincides with easing concerns over China’s economic outlook.
As of September 30, the MSCI China Index traded at approximately 10.2 times forward earnings, below its 10-year average of 11.7 times. Exchange-traded funds focused on China and Hong Kong recorded USD 19 million in inflows in August, reversing July’s USD 1.94 billion in outflows.
Cautious Re-engagement and Sector Focus
Some analysts cautioned against interpreting this positioning shift as a widespread return of foreign investors to Chinese equities. Louis Wong, executive director at Phillip Capital Management, characterized the change as a halt to selling, not a broad bullish turn. He attributed the shift to investors’ acceptance of China’s attractive valuation and a perception that the Chinese economy performed better than anticipated.
Interest is concentrated in AI semiconductors and equipment, data-centre power and grid infrastructure, as well as selected internet platforms with visible cloud growth
Wong anticipates that foreign exposure to Chinese equities will increase gradually and moderately. With the 10-year US Treasury yield around 5.3 percent, investors face a high hurdle for adding exposure to a market still linked to policy and geopolitical risks.
Global investor interest is concentrated in AI semiconductors and equipment, data-center power and grid infrastructure, and select internet platforms with demonstrable cloud growth, Wong noted. He warned that disappointing economic momentum, slow AI earnings growth, tighter US export controls, or further yuan weakness could derail this shift.
Wang Qi, Chief Investment Officer at UOB Kay Hian’s wealth-management division, expressed more caution, indicating he has yet to observe a genuine shift in global investor sentiment towards Chinese equities amidst higher US interest rates. Wang believes global investors would need to see “sizeable and effective” stimulus from the Chinese government before significantly increasing their exposure.
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