May 22 2024: Global hedge funds have continued to increase their holdings of Chinese equities for the fourth consecutive week, joining numerous investors betting on a market rebound. Since February, Chinese stocks, which had been significantly undervalued, have been rallying as Beijing implements measures to address economic challenges and macroeconomic data shows signs of recovery.
According to a note from Goldman Sachs’ prime brokerage team, seen by Reuters on Tuesday, hedge funds have bought Chinese stocks in seven of the past eight weeks. Although the exact amount of these purchases was not disclosed, the trend reflects growing confidence in China’s market prospects.
Market Performance and Hedge Fund Strategies
China’s markets have unexpectedly outperformed major global markets this year. The Hang Seng Index in Hong Kong has surged by a third from its January low, and the MSCI China Index has risen by 16% year-to-date. On Monday, Goldman Sachs raised the price targets for both the MSCI China and China’s blue-chip CSI 300 Index.
Some hedge fund investors are capitalizing on the market rally by purchasing call options, aiming for larger gains as stock prices rise. “The combination of decade-low allocations to China from both hedge- and long-only mandates and the blistering pace of the recovery has caught investors off-guard in the past months,” wrote analysts led by Kinger Lau. “The resulting performance pressures may have incentivized investors to close underweight gaps or raise exposures in Chinese stocks, likely reinforcing and fueling the upturn as the positive spiral takes hold.”
Economic Stimulus and Investor Sentiment
In efforts to restore market confidence, China recently initiated 1 trillion yuan ($138 billion) in stimulus bond issues and unveiled several measures to support its struggling housing market. These steps are part of broader initiatives to stabilize and stimulate the economy, which has faced various challenges.
Skepticism and Volatility
Despite the optimism among many investors, not all are convinced by the recovery narrative. Indus Capital, a New York-based hedge fund, remains underweight on China, although it has recently added some stocks to its portfolio. Byron Gill, managing partner at Indus Capital, expressed caution, noting, “The market still offers us more short opportunities than longs, particularly as we encounter more volatility due to ongoing economic challenges,” citing the country’s increasing deflation pressures.
As the market continues to evolve, the actions and strategies of hedge funds and other investors will be closely watched to gauge the sustainability and strength of the recovery in Chinese equities.
($1 = 7.2392 Chinese yuan renminbi)
