Foreign investors bullish on A-share market

Foreign institutions' interest in China assets and investment opportunities in the Chinese market has remained robust amid rising market volatility elsewhere due to the banking credit crisis.

Northbound capital — the amount of A shares that overseas investors purchase via the stock connect mechanisms linking the Shanghai, Shenzhen and Hong Kong stock exchanges — saw its eighth consecutive day of net inflows, reaching 479 million yuan ($69.6 million) on Wednesday.

Net inflows of northbound capital have reached $23 billion so far this year, exceeding the whole-year figure of $13 billion in 2022, according to Goldman Sachs. This reflects overseas investors' positive outlook for the performance of the A-share market this year, said Kinger Lau, the investment bank's chief China equity strategist.

Since March 13, when 1,034 A-share companies were newly included in the stock connect program, foreign investors have increased their holdings of A-share companies specializing in sectors including electronics, power equipment, biomedicine, mechanical equipment and computers, according to Industrial Securities.

Market research, which is considered a prelude to investment, has been conducted more frequently. Overseas institutions have surveyed 58 A-share companies from March 9 to Wednesday, according to market tracker ChinaDataPay. Industrial robot maker Estun Automation received 31 such surveys, the most among the companies during the period.

According to Lau from Goldman Sachs, A-share companies will see their average profit increase 17 percent year-on-year in 2023, driving up the overall market performance. The A-share market will generate a 20 percent return in the next 10 months, and investors should increase their exposure in this respect, he said.

Foreign mutual fund companies have also stepped up releasing new products in China.

Neuberger Berman, a New York-based asset management company, officially launched its first fixed income product in China on Tuesday, raising more than 4.09 billion yuan. This is the first fixed income product with a value of over 4 billion yuan issued in the Chinese onshore market so far this year, according to market tracker Wind Info.

As explained by Neuberger Berman's portfolio managers, fixed income products' long-term investment value is especially noticeable when market volatility rises.

Fidelity International, another industry giant, will issue a six-month stock-based product on April 3, which will be the first mutual fund product in China. Helen Huang, general manager of FIL Fund Management (China) Co, Fidelity's subsidiary in China, said it is the right time to increase exposure to the A-share market, as its major indicators, such as profitability growth and valuation, have been hovering around historic lows.

In the short term, consumption, property and infrastructure companies will offer more opportunities as they are in line with China's economic recovery trends. Long-term opportunities can be found from high-end manufacturing and medicine companies, Huang added.

Following the sudden collapse of Silicon Valley Bank on March 10, the banking industry in the United States and Europe has seen other players such as Signature Bank, First Republic and Credit Suisse landing in deep financial trouble.

The Chicago Board Options Exchange's Volatility Index has surged drastically ever since SVB's collapse, jumping from 19.11 on March 8 to 26.52 on March 11, the highest level in five months.

Positive signal

But Lau from Goldman Sachs said that the odds are low for the banking crisis to spill over to China. The decision by the People's Bank of China, the nation's central bank, to reduce the reserve requirement ratio for financial institutions by 0.25 percentage point on March 27 is a positive signal showing the Chinese government's strong support for economic growth, he said.

Zhang Jingjing, chief macroeconomic analyst at China Merchants Securities, said that the risks faced by overseas financial institutions could result in economic recession in the US and investors' weakening risk appetite, further exerting pressure on US stock prices.

Global investors will therefore look for opportunities outside the US, with China being one choice given its stabilizing economic recovery proved by improved consumption and industrial growth data as well as supportive policies such as the RRR cut, she said.