How To Position For A Rebound In China

Chinese equities have ripped higher this year, and we see catalysts to support further gains.

MSCI recently announced plans to add more Chinese A-share stocks to its traditional China-focused indexes and to its broader emerging market and regional indexes. We think this will add further buying momentum to Chinese equities throughout the year.

Chinese A-shares currently have only a 5% inclusion factor in their indexes—but MSCI is upping the A-shares’ weight in three equal tranches to 20% by the end of November.

This adds to a few other catalysts for potential outperformance of Chinese equities:

1. U.S.-China Trade Deal: Pessimism about a long-lasting trade war has abated. While there are fundamental differences in the worldviews of the U.S. and China, we believe President Trump is likely to follow a similar approach with China to the one he used in negotiating trade deals with Canada and Mexico—particularly after his “no deal” discussion with North Korea.

2. Chinese Stimulus: Concerned about the slowdown of GDP, the Chinese government has taken several measures to stimulate growth by increasing liquidity and borrowing. In Q4, China launched the targeted medium-term lending facility (TMLF), which offers a lower interest rate than the existing medium-term lending facility (MLF) to specifically support small and private firms’ growth. In January 2019, the People’s Bank of China took further steps to release $116 billion into the market by cutting required reserve ratios by 100 basis points (bps).1

3. Federal Reserve (Fed) Pause: The Fed has lowered its expectations for the pace of rate increases this year. Similar to the 2016 pause, we believe risk assets can continue to rally as fears of a recession are pushed into the future.

Tracking Money Flows into China

While 2018 was a disappointing year for returns, China’s Stock Connect program was a huge success. In the chart below, we track net flows from foreign investors into Chinese stocks on mainland exchanges.

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