Global hedge funds have significantly increased their exposure to Chinese stocks, including those listed on both domestic and U.S. exchanges, according to a recent Goldman Sachs report. This shift comes in the wake of a high-profile Politburo meeting in July that suggested Beijing would implement “countercyclical measures” to stimulate short-term economic growth in a market that has underperformed globally.
Increased Hedge Fund Allocations
Goldman Sachs’ report indicates that hedge funds have expanded their holdings in Chinese stocks over the past month. However, specifics on the exact purchases were not disclosed. Despite this uptick, allocations to yuan-denominated stocks and American depositary receipts (ADRs) remain near five-year lows, reflecting a cautious but growing interest.
In addition, foreign investments through the northbound investment route—part of the cross-border exchange link program—totaled $500 million in July. This highlights a broader trend of increased overseas inflows into Chinese domestic stocks.
Market Valuations and Recovery Expectations
China’s stock market valuations are currently at the lower end compared to global standards, according to Goldman Sachs analysts. The MSCI China index has corrected by 13% since its peak in May, lagging behind both developed and emerging markets in performance over the past three months.
The uptick in foreign investment is attributed to increased optimism that Beijing will prioritize short-term economic growth. At recent meetings, including the Politburo gathering, Chinese leaders emphasized achieving the annual growth target of approximately 5% and stimulating household consumption as primary objectives.
Goldman Sachs noted that policymakers appear more focused on addressing immediate economic challenges compared to earlier in the year, signaling a commitment to proactive economic measures.
Broader Hedge Fund Trends
In addition to China, global hedge funds have also increased their positions in Japanese stocks, marking the largest inflows in nine months. This has resulted in hedge funds being overweight in Japanese shares for the first time since May 2019, reaching their highest holding levels in four years.
Conversely, emerging markets such as Taiwan and India experienced outflows of $3.5 billion and $1 billion, respectively, in July. South Korea saw inflows of $600 million, while Southeast Asian markets attracted $200 million in investments.
Recent Fund Flows and Market Volatility
Stock-focused mutual funds globally invested $9 billion into equities last week, a decrease from the $22 billion invested the previous week. U.S. markets received $4.5 billion of this new capital, while European and Japanese markets saw withdrawals of $1 billion and $900 million, respectively.
The recent volatility in global financial markets has been influenced by softer U.S. jobs data, which has raised concerns about a potential economic slowdown in the U.S., where interest rates remain high. Additionally, an unexpected hawkish shift in Japan’s monetary policy has triggered significant market fluctuations. The Bank of Japan’s decision to raise interest rates for the second time in 17 years, with speculation of further hikes, has contributed to the instability and the unwinding of carry trades.
Overall, the global investment landscape remains dynamic, with shifting investor sentiment and geopolitical developments influencing market movements.
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