Foreign investors hold positive view on stocks

Policy moves, chances to go overweight on key sectors seen as big opportunities

Foreign investors hold a positive outlook on the Chinese equities market as can be seen from three indicators: their recent views on the investment value of China assets; the return of foreign capital to the stock market; and industry leaders further tapping into the Chinese market, market insiders said on Monday.

Meng Lei, China equity strategist of UBS Securities, said the guideline released by the State Council on Friday, seeks to strengthen regulation, forestall risks and promote high-quality development of the Chinese capital market. It will ensure adequate liquidity in the A-share market amid more long-term capital inflows while the investment value of A-share companies will increase in anticipation of better quality.

At present, the A-share market has overpriced the concerns over the economic growth rate while underestimating policy incentives, said Meng. He suggested investors should go overweight on A-share electronics, food and beverage, oil, coal and telecommunication companies.

In a LinkedIn post in early April, Ray Dalio, chief investment officer at Bridgewater Associates, wrote that his continued investment in China is crucial for him to "understand the world "and for "diversification".

China's current economic concerns are "manageable" as Dalio believes Chinese policymakers will deal with them well by being "smart and courageous". He is already seeing signs of China boosting liquidity and advancing debt restructuring to engineer "a beautiful deleveraging".

Dalio further wrote that the time to buy will arrive when risk appetite is low and assets are cheap, "which is now the case with Chinese equities".

"To me the key question isn't whether or not I should invest in China so much as how much I should invest," he wrote.

David Huang, senior investment strategist at international asset management firm AllianceBernstein, said that positive performance of the A-share market can be expected later this year, given its lower evaluation, recovery in macroeconomic indicators and investors' stronger confidence propped up by regulators' stress on improving public companies' quality.

Meanwhile, more foreign capital will return to the Chinese stock market as the key US interest rate is likely to be lowered later this year. While many international investors are now spooked by the high valuation of US stocks whose average price-to-earnings ratio has reached 22 times, the A-share market's strong appeal for them is quite evident given its PE ratio is only around 14 times. The large market size and adequate liquidity of the A-share market will help international investors to diversify their risks, he said.

While the benchmark Shanghai Composite Index gained 1.26 percent and the Shenzhen Component Index rose 1.53 percent on Monday, northbound capital, which foreign investors use to buy into A shares via the stock connect program linking the Shanghai, Shenzhen and Hong Kong bourses, reported a net inflow of over 8 billion yuan ($1.1 billion).

An HSBC Holdings Plc report said that more than 90 percent of emerging market funds are adding back their positions in the currently underweight A shares.

The $2.5 billion emerging markets fund of US investment firm Candriam Belgium NV has raised its exposure to China "partly at the expense of India", said portfolio manager Vivek Dhawan.

James Donald, head of emerging markets at Lazard Asset Management, said the number of investment cases in China has increased recently given the cheaper prices of Chinese equities.

Nathan Thooft, chief investment officer of multi-asset solutions at Manulife Investment, said he has been adding Chinese equities to his portfolio, mainly because China's path is in favor of a more robust economic environment and there is going to be a bit more positive sentiment toward risk assets in the coming 12 months.

The world's leading investment companies and institutions have been expanding their footprint in China. In March, both KKR Investment Management (Shanghai) Co Ltd and Brookfield (Shanghai) Private Funds Management Co Ltd opened offices in Shanghai.

FIL Fund Management China, the wholly foreign-owned enterprise of world-leading asset manager Fidelity International, released on Wednesday a hybrid mutual fund product, its fourth such product in China.

Zhou Wenqun, equity portfolio manager of Fidelity International, said China is seeing a change from old to new economic drivers amid economic recovery. Structural highlights like new quality productive forces were stressed in this year's two sessions. Sectors in line with the path of economic transformation and technology innovation, like artificial intelligence computing and consumer electronics, will churn out the most investment opportunities, she said.