China fund inflows hit one-year high despite sluggish growth
Goldman Sachs says US$10b has been poured into Chinese equities this year, helped significantly by the Shanghai-Hong Kong Stock Connect
Despite muted interim earnings from Chinese companies, the China and Hong Kong stock markets recently recorded the largest fund inflows in more than a year, helped by the global “search for yield” and further relaxations in China’s capital markets, which more than offset the weakness of active fund inflows, against a backdrop of China’s sluggish growth momentum.
The MSCI China Index, a key China market investment index, has jumped 12 per cent since the Brexit vote on June 23, lifting the index’s year-to-date performance gains to 5 per cent.
That rally was “primarily on valuation expansion and fund inflows”, said Goldman Sachs analyst Si Fu in a research note on Wednesday.
Funds going into Hong Kong and China equities have hit US$10 billion since the start of the year, led by strong inflows from global exchange traded funds (EFTs) and southbound buying from mainland investors through the Shanghai-Hong Kong Stock Connect scheme, Fu said.
In particular, during the week ending August 17, the mainland and Hong Kong equity markets recorded the largest weekly inflow since June 2015, around US$990 million, excluding local funds, according to recent statistics from EPFR Global.
The US$912 million equity inflows during the same week into China was the largest figure in five months, while the US$78 million into Hong Kong was also at a yearly high.
During the same week, A-share ETFs listed overseas saw US$183 million of inflow, the first inflow in seven weeks.
Jefferies analysts say the Hong Kong market is benefiting from the search for yield due to global monetary policy, with international investors setting aside worries over China and grabbing “the cheap, well covered dividends at half the price-to-book of their S&P 500 cousins”.
“Since 1990, Hong Kong’s dividend yield has never been higher than both the treasury yield and Fed Funds cash rate as it is presently,” they said.
The recent approval of the Shenzhen-Hong Kong Stock Connect has also thought to have increased China’s market accessibility to international investors and improved the probability of China A-shares inclusion in MSCI’s benchmark indexes.
“A possible MSCI inclusion for China A-shares is a catalyst for stocks,” said Jefferies analysts.
“The entry in October of the RMB into SDR (Special Drawing Right) will also help the currency,” they added.
The Chinese currency will be included in the basket of currencies that make up the IMF’s SDR from October 1, the IMF announced earlier this year.
In addition, the possibility of China’s onshore bond market being included in JP Morgan’s emerging-market bond indexes “would be a huge positive for one of the world’s largest bond markets”, Jefferies analysts said. They remain bullish, too, on Hong Kong’s blue-chip stocks within global asset allocation.
Goldman Sachs analysts have looked into the dynamics of capital flows in the Hong Kong and China markets, and concluded that “flows are not equal” .
Flows from ETFs were strong, as passive inflows to emerging markets have been well correlated with low bond yields globally, “exemplifying the search for yield globally, amid easy monetary policy and the positive carry in EM countries versus the ultra-low interest rates in the developed world”, the Goldman analysts said.
ETF inflows amounted to US$1 billion since the Brexit vote in late June, and have reached US$6 billion since the beginning of the year.
Southbound buying via the Shanghai-Hong Kong Stock Connect has also been another major source of inflows to Hong Kong, driven by entrenched market expectations for the Chinese yuan to weaken further against the US dollar and the resulting demand for mainland investors to diversify their FX exposures.
In the year to date, a total US$14 billion of southbound flows have come to Hong Kong, according to Goldman.
And those two above sources of capital inflows have offset the weakness in active fund inflows, analysts from the US firm said.
Active funds have posted 13 straight months of outflows since July 2015, with an estimated outflow of US$28 billion.
“They (active flows) appear better linked with China fundamentals, with outflows moving with the slowing China growth momentum in tandem,” the Goldman analysts said.
Nevertheless, they anticipated macro flows to stay “equity-friendly” in the near term, especially if the Federal Reserve stays dovish and the yuan falls further against the greenback.
Goldman stays “Marketweight” on China, while suggesting a targeted approach to hedge against the liquidity risk.
Their top picks in Hong Kong and China stocks included index heavyweights with low turnover velocity, lightly-positioned “quality laggards” such as software and insurance sectors, and Hong Kong companies expected to see further southbound Stock Connect buying.