Global hedge funds that employ an equities long-short strategy are showing increasing optimism towards China, as evidenced by a significant uptick in their purchases of shares listed in Hong Kong, according to a recent note from UBS Group.
Hong Kong’s stock markets, which closely track China’s economic performance, have staged a remarkable recovery since March, buoyed by economic support measures rolled out by Beijing. The Hang Seng Index surged over 7% in April, marking its strongest monthly gain since January 2023 and outperforming most major markets.
UBS’s observations indicate a notable shift in the dynamics of the Hong Kong market towards the end of April. This shift contrasts with the trend observed since February, which was characterized by inflows primarily driven by short covering. Despite this, fundamental long-short hedge funds continued to accumulate shares of Hong Kong-listed Chinese companies, as highlighted in UBS’s report tracking hedge fund flows dated May 1.
The bulk of this buying activity was concentrated in the technology and consumer discretionary sectors, although UBS did not disclose the specific amount of these flows.
Notably, index heavyweights such as Meituan, Tencent, and Haidilao witnessed significant increases of 21%, 15%, and 13%, respectively, in the previous week.
At the outset of 2024, many funds had adopted a bearish stance on China while favoring stocks in Japan and the United States. However, sentiment towards the Chinese economy has experienced an upswing following measures aimed at stabilizing the market, a slight easing of tensions between the U.S. and China, and declines observed in both U.S. and Japanese markets.
Beijing’s proactive efforts to address the property crisis through policy easing and housing inventory management have further contributed to the positive sentiment. In line with this, UBS recently upgraded China and Hong Kong stocks to overweight. Goldman Sachs also expressed optimism about China’s potential for a “re-rating,” citing government initiatives aimed at enhancing corporate governance and elevating the quality of listed companies.
Moreover, large global long-only funds have been observed to increase their exposure to China through investments in Hong Kong-listed stocks, according to a sales note issued by BofA Securities on Thursday.
Given the recent market volatility in Japan and the U.S., investors may be seeking cost-effective diversification opportunities for their portfolios in Hong Kong or China, as suggested by the sales note. Both Japan’s Nikkei and the U.S. benchmark S&P 500 registered declines of over 4% each in the previous month.