UBS Equities-China Equity Strategy _3Q24 investor positioning update - fo...-111374373

ab6 November 2024Global ResearchChina Equity Strategy3Q24 investor positioning update - foreign funds less underweightInternet favoured by both onshore and international investors Following the sharp market rally in end September, our tracking of c.800 active foreign institutional funds suggests their underweight position has improved to -1.7% in 3Q24 from -2.4% in 2Q24. We suspect the reduction in China underweight was contributed by a combination of increased investor allocation and portfolio outperformance. Looking at the top 40 global investors (including both passive and active holdings), their equity holdings in China were the highest YTD but remain low, below 2023 levels. Internet, healthcare and autos saw the most active foreign inflows in 3Q24 while renewables, banks and consumers saw the most outflows. From a stock connect perspective, southbound inflows into the HK market remained robust in 3Q24 at US$17bn with top bought sectors including internet (Alibaba in particular) and financials, while northbound investors have also returned with total estimated inflows of US$7.5bn with banks and pharma the top bought sectors during the quarter.Surprisingly more active foreign funds cleared out their China equity positionOur tracking of c.800 active foreign institutional investors which altogether hold c.US$210bn in Chinese stocks showed that their underweight position improved to -1.7ppt in 3Q24. That said out of these funds, despite having Chinese stocks in their benchmark c.200 funds do not hold any Chinese equities as of 3Q24 (AUM of US$274bn) and there were 15 global mandated fund with a small positioning in China that cleared out their position in 3Q24. Concurrently there are 18 EM mandated funds (up from 15 last quarter) which are no longer holding any China positions - for these funds, we estimate US$8.8bn of Chinese stocks would need to be bought to fully neutralize their positions. Southbound investors continued to adopt a barbell strategyIn stock connect, southbound inflows slowed down to US$17bn in 3Q24 with the top bought sectors including financials and internet. Post the market rebound on 23 Sept, southbound investors' risk appetite appeared to have slightly increased, adding internet and healthcare names with Alibaba the top bought name by far. With the HK listed stocks offering 1ppt in additional dividend yield and strong interest in the internet names based on our recent discussions, we expect southbound inflows to sustain. Meanwhile northbound investors appeared more cautious with banks the most bought sector in 3Q, though food & beverage saw modest inflows after being the most sold sector in 2Q24, suggesting sentiment has improved.Foreign investor sector flows and crowdedness observationsIn 3Q24 active foreign institutional investors increased their holdings in sectors including internet and health care, while shedding their positions in renewables and consumer. Our quant team's data suggests that institu

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2024-11-18
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