Fund Managers Begin To Raise Weight On China: Here's What It Could Mean For India

Global fund managers are increasing China's weight in their portfolios as the government eases Covid-19 policy and offers support to its property market. That could have an impact on Indian stocks.

"The immediate risk of a hard landing in China has been averted with the long anticipated central government measures to address the downturn in property," Jefferies said in a Nov. 17 note, titled Of 'Masks and Charm Offensives'.

The research firm will increase its China weight by two percentage points, while lowering that of India and Indonesia by one percentage point each.

Citing the Greed and Fear Index, Jefferies said the gauge has picked up "growing confidence" that China’s Covid policy is being "meaningfully relaxed, even if there is as yet no formal admission of such, despite surging Covid cases".

While China's property data remains negative, the government's package will be a reprieve for private developers whose bonds were discounting bankruptcy, according to Jefferies.

Morgan Stanley, too, increased its targets for the Chinese stock market, Bloomberg reported. It expects MSCI China Index to gain 14% by end of 2023.

Chinese stocks have reached “the kind of valuation discount that we thought would be characterized by a really bearish scenario. So now with incrementally more positive news flow, it can start to do better,” Jonathan Garner, Morgan Stanley’s chief Asia and emerging market equity strategist, told Bloomberg in an interview last week.

Global funds have net bought onshore Chinese shares worth 41-billion yuan ($5.8 billion) so far in November, according to Bloomberg. That's a rebound from of 57.3 billion yuan outflow in October, the biggest since March 2020.

Not everyone is that optimistic.

JPMorgan Asset Management expects reallocation of funds from China by U.S. institutional investors to continue over uncertain domestic polices, Taiwan and tensions with the U.S., Bloomberg reported.

And as high as 80% of the respondents from the Asia Fund Manager Survey by BofA Securities, released on Nov. 15, said the China equity market is in a "structural de-rating process". They cited Zero-Covid policy and geopolitics as risks.

Nearly 38% of the fund manager survey participants expect "weaker profits" in Asia in the next year, with net 67% deeming consensus EPS growth estimates as "too high", according to BofA Securities.

"Our leading indicators concur, projecting the next 12-month Asia ex-Japan EPS growth at -2%, well short of the consensus expectations of 7% growth."

However, nine out of 10 participants to the survey are optimistic of a higher level of expected returns from Asia Pacific ex-Japan, aided by "perceived undervaluation".

To be sure, foreign investors have turned net buyers of Indian stocks after two months in November, with net inflows of more than Rs 30,000 crore so far this month. Analysts, too, remain bullish on India.

Morgan Stanley's India Managing Director Ridham Desai expects India to lead a "staggering 20% of global growth" by the end of the current decade, as it moves towards a growth model focused on encouraging investment and leveraging exports.

The 4Ds—demographics, digitalisation, decarbonisation, and deglobalisation—are favouring India, which will possibly make it the "world's third-largest economy and stock market before the end of the decade", Desai told BQ Prime.

Domestic stock benchmarks ended lower on Friday, snapping a four-week gaining streak and after Indian bourses touched a 52-week highs on Nov. 11.