Mainland shares getting back on track

Foreign investors' rising interest in Chinese mainland equities — their exposure to A shares has increased recently — can be attributed to the obvious value of the stocks and China's continued efforts to optimize its capital market structure, said market mavens and experts.

Their comments came amid continued capital inflows from foreign investors. As of Tuesday, northbound capital — the amount of funds used by overseas investors to buy A shares via the stock connect program linking the Shanghai, Shenzhen and Hong Kong bourses — reported net capital inflows of nearly 35 billion yuan ($4.9 billion) so far this year. The figure is fast approaching the 2023 whole-year number of 43.7 billion yuan.

The monthly northbound capital inflow hit a 12-month high of nearly 61 billion yuan in February. Some 24 A-share companies have seen foreign investors purchasing more than 20 million shares in each of them since the beginning of February, taking the latter's shareholding in each to 5 percent.

Semiconductor display manufacturer BOE Technology Group Co Ltd attracted the most attention as foreign investors increased their exposure by a whopping 462 million shares, representing a 1.4 percent stake, in less than two months.

Experts expect the trend will continue in the following months, especially after FTSE Russell, the London-based index provider tracked by a large number of passive funds, added 76 A-share companies to its FTSE Russell Global Equity Index Series on Monday.

The adjustment, based on FTSE Russell's first-quarter adjustment, will bring in 5 billion yuan in additional capital into the A-share market, elevating passive funds' interest and trading activity, said Guo Feng, chief investment adviser at Northeast Securities.

The A-share market has added appeal for foreign investors now as expectations for supportive policies and China's economic recovery are improving. Companies providing higher dividends and technology-driven growth enterprises will be the two investment themes, said Guo.

Tian Lihui, director of the Institute of Finance and Development at Nankai University, said industry leaders in electronics, biomedicine and computers make up the most of FTSE Russell's latest adjustment. This reflects that international investors are attaching greater importance to China's emerging industries as the country advances its economic restructuring. It also shows their recognition of China's ongoing capital market reform and development, he said.

Ronald Temple, Lazard's chief market strategist, said he believes increasing allocation to China makes sense now as it will be "one of the best performing equity markets as a trade over the next 12 to 18 months".

Indeed, outflows from Chinese equities slowed toward the end of February and regional fund managers started to add growth and tech stocks to their portfolios, wrote Morgan Stanley strategists, including Gilbert Wong and Laura Wang, in a March note on positions by long-only funds.

This may be considered an early sign that money managers are rethinking their asset allocations across Asia, helping China to regain its heft in global portfolios, they said.

Kinger Lau, chief China equity strategist at Goldman Sachs, said that overseas investors' interest in the Chinese equities market has picked up, especially after the two sessions. They expect more supportive macroeconomic, industry or capital market policies, which would help improve A-share companies' profitability, he said.

As estimated by Lau's team, the CSI 300 index, comprising A-share large-caps, will spike 19 percent year-on-year while the MSCI China Index, which tracks Chinese equities more extensively, will likely surge 17 percent this year. Improving profitability and recovery in market valuations are the two major drivers, according to Goldman Sachs analysts.

Meng Lei, China equity strategist at UBS Securities, also expressed positive outlook on the A-share market performance this year. The average profitability of A-share companies will increase 8 percent year-on-year this year, up from 5 percent last year. The increase in China's nominal GDP, the recovery in the producer price index, combined with moderately relaxed fiscal and monetary policies (including the credit policy), will drive the A-share market from now on.

State-owned enterprises may not only serve as a major theme this year but also are worth long-term attention as the central regulators stipulate higher requirements on their market valuation management. Most SOEs are undervalued at present, which indicates more long-term capital inflows, Meng said.