How traders might capitalize on China’s stock rally

Here's what you need to know to stay ahead and make informed decisions during this rapid shift in the markets.

China’s sudden stock rally is pulling money away from other Asian markets, a move that could significantly impact global portfolios. The rally comes after Beijing’s latest round of stimulus measures, which have triggered a shift in investor behavior. Traders are reallocating funds back to China, leading to outflows from markets in Japan and Southeast Asia.

This rotation is already noticeable. South Korea, Indonesia, Malaysia, and Thailand all reported net outflows last week. Meanwhile, BNP Paribas SA noted that over $20 billion was withdrawn from Japanese equities in the first three weeks of September. This marks a sharp reversal for Asia ex-China equities, which had previously attracted investors seeking returns outside of China. Taiwan’s chipmakers and India’s economic growth had driven gains in these markets, while Southeast Asia benefited from lower US interest rates.

“We are trimming our long positions across Asia to fund China purchases,” said Eric Yee, senior portfolio manager at Atlantis Investment Management in Singapore. “Everyone is doing so. It’s a good policy-driven recovery from rock bottom. You wouldn’t want to miss out on such an opportunity.”

The MSCI China Index has surged more than 30% from a recent low, thanks to a series of measures designed to spur economic growth. Trading turnover in China and Hong Kong hit record highs earlier this week.

Even after the recent rally, Chinese stocks remain attractively valued. The MSCI China Index is still trading at 10.8 times forward earnings, which is below its five-year average of 11.7 times. Mutual funds globally currently have just a 5% allocation in Chinese equities, the lowest level in a decade, according to EPFR data from August. This indicates there’s significant room for fund managers to increase their holdings in China.

“We believe some foreign investors are reducing their Japan overweight and reallocating back to China,” wrote BNP strategists led by Jason Lui in a recent note.

However, this shift is still in its early stages. BNP Paribas emphasized that there hasn’t been a major withdrawal of foreign money from India or other emerging markets outside China. Some analysts, like Jeffrosenberg Chenlim of Maybank Investment Bank Bhd., see the fund flow as “a temporary event.” Indeed, a gauge of Chinese stocks listed in Hong Kong fell by as much as 4.9% on Thursday, breaking a 13-day winning streak.

“While it’s still early days, there could be an argument for a rotation out of Japan or India into China,” said Mohit Mirpuri, a fund manager at SGMC Capital Pte in Singapore. “China will be the standout performer by the end of 2024. The current momentum is hard to ignore.”

Conclusion

For traders, this shift in market dynamics presents both risks and opportunities. Staying alert to the latest policy changes in China, monitoring global fund flows, and maintaining diversified portfolios can help manage risks while capitalizing on market trends. Traders who keep a close eye on key assets and adjust their strategies accordingly will be best positioned to take advantage of China’s resurgence and the resulting shifts in global markets.