(Bloomberg) -- Chinese stocks have been on a tear, with the Nasdaq Golden Dragon Index soaring 19% in the last four days, and the shares should be a key part of investors’ plans once the US election is over, according to Scott Rubner, managing director for global markets and tactical specialist at Goldman Sachs Group Inc.
US-listed China stocks extended their rally on Thursday after the nation’s Politburo announced plans for fiscal spending to stimulate consumption and rein in local government debt, as well as measures to stabilize the country’s troubled real estate market. The moves are part of a coordinated economic plan unveiled this week that includes handouts and subsidies as well as a broad policy package aimed at arresting a growth slowdown that has battered consumer confidence.
The Golden Dragon index, which is made up of companies with shares traded in the US but that conduct the majority of their business in China, jumped as much as 13% Thursday, the most intraday since March 2022. The CSI 300 Index, a gauge of Chinese onshore stocks, is up 11% in the last four sessions and headed for its biggest weekly gain in almost a decade.
But despite the rally, Rubner thinks the long-awaited recovery in Chinese equities may finally have arrived and, if so, investors should want to get in on it.
“I really think this time is different for China,” Rubner wrote in a note to clients Thursday, noting that being underweight Chinese equities is the “largest consensus trade” in the global stock market. “Re-emerging markets have quickly become a favored post-US election trade for November and December,” he wrote, referring to demand for bullish call options expiring at the end of the year.
Hedge Fund Buying
Take hedge funds. Before the recent gains, they’d allocated less than 7% of their capital to Chinese equities, roughly a five-year low. Indeed, since the start of 2023, Chinese stocks remain meaningfully net sold by hedge funds in cumulative notional terms.
But they reversed course earlier this week and rushed into Chinese equities, posting the largest daily net buying since March 2021 and the second largest in the past 10 years on Tuesday, according to Goldman’s prime brokerage desk.
Mutual funds also have more room for buying. As of the end of August, they had a 5.1% allocation to Chinese equities globally, which is historically low, Rubner wrote. But the bigger boost could come from passive investors. Of the $695 billion of inflows for US-listed exchange-traded funds in 2024, only $4.9 billion has gone into Chinese ETFs.
Passive Appeal
“Chinese and emerging market assets do not benefit from passive inflows every day like the US market, but this is changing,” Rubner wrote.
The Xtrackers Harvest CSI 300 China A-Shares ETF (ASHR), which tracks China domestic A shares, saw over $173 million worth of inflows on Wednesday, the most since June 2022, according to data complied by Bloomberg. And Rubner expects more to be on the way.
In terms of specific trades, he recommends buying the iShares China Large-Cap ETF (FXI) November $34/$38 call spread or the iShares MSCI Emerging Markets ETF (EEM) November $48/$53 call spread.
--With assistance from Yiqin Shen.
©2024 Bloomberg L.P.
