International investors are putting more money into Chinese stocks, even as local investors have remained cautious on the mainland markets.
Mainland Chinese stock funds saw net inflows of $16.6 billion in January — only the fourth time since the pandemic that monthly inflows have exceeded $10 billion, according to research firm EPFR Global. That followed nearly $11 billion in net inflows in December, the data showed.
“Investor interest in China has actually strengthened coming into the fourth quarter of last year,” Cameron Brandt, director of research at EPFR, said in a phone interview last week. “The driver there I think is a perception — especially among institutional investors — that in the emerging markets space, China is, for a variety of reasons, something of a safe play this year.”
The latest wave of buying is from institutions, rather than retail investors whose interest in China dropped off since early last year, Brandt said.
The divergent interest comes as global investment firms have turned increasingly positive on mainland Chinese stocks in the last several months.
Analysts are betting, in part, that Beijing wants to ensure growth in a year the ruling Chinese Communist Party is set to choose its next leaders at a national congress in the fall. At the same meeting, President Xi Jinping is expected to take on an unprecedented third term in power.
“Everything will need to look quite to perfection for [such] a monumental event,” Jason Hsu, chairman and CIO of Rayliant Global Advisors, said in a phone interview last week. “For anyone who is a rational investor, this is probably as favorable a sentiment as you’re going to get.”
China has also become “a good contrarian play” this year because the local market is entering a period of stimulus and easier policy, while the U.S. Federal Reserve embarks on a tightening cycle, Hsu said.
Expect Chinese property market revival in second half of the year: German bank
Goldman Sachs and Bernstein are so optimistic that they each released lengthy reports in the last few weeks recommending mainland Chinese stocks, also known as A-shares.
The upbeat calls come despite worries about how regulatory uncertainty may have made those stocks “uninvestable.”
“We believe China A shares, a US$14tn asset class, have become more investable given the ongoing liberalization and reform measures in the Chinese capital markets,” Goldman’s chief China Equity Strategist Kinger Lau and his team said in an 89-page report Sunday.
In the last 18 months, Beijing has cracked down on alleged monopolistic practices by Chinese internet companies and property developers’ high reliance on debt, among other issues. The sometimes abrupt policy changes have surprised global investors.
Global emerging markets funds have turned to India in the meantime, EPFR data showed.
“Managers of funds who run diversified funds, they’re less enthusiastic about China, certainly relative to other markets,” Brandt said.
Average allocation to China has fallen from 35% of the portfolio in the third quarter of 2020 to 27% as of Jan. 1, according to Brandt. During the same period, he said the funds’ allocation to India rose from 8.5% to 12.7%.
Market pessimism in China
Although the mainland Chinese stock market is the second largest in the world by value, it differs significantly from that of the U.S., the world’s largest.
Speculative retail investors rather than institutions dominate the mainland market, which for years has drawn comparisons to a casino.
But there have been signs of progress.
In a sign of how the market is maturing, index giant MSCI decided in 2018 to add some China A-shares to the benchmark MSCI Emerging Markets Index. The move forced international funds tracking the index to buy more A-shares. But retail investors still dominate the mainland market by far.
CHINA EQUITY STRATEGIST, BANK OF AMERICA SECURITIES
Weak onshore sentiment, along with better opportunities in developed markets, have contributed to J.P. Morgan Asset Management’s neutral view on Chinese stocks since early last year, Sylvia Sheng, global multi-asset strategist at the firm, said in a phone interview Monday.
She said if growth improves in the second quarter, sentiment could turn as well, noting: “We are actually looking to get more positive on Chinese equities.”
The Shanghai composite is up about 3% for February to-date after a week-long closure for the Lunar New Year holiday. The index had kicked off the year with a decline of 7.65% in January — its worst month since October 2018. Last year, the index posted relatively muted gains of 4.8%.
Everyone’s sentiment on investing in A-shares has dropped significantly, Schelling Xie, senior analyst at Stansberry China, said in a phone interview Friday. He pointed to uncertainty about the degree of change on regulation and economic growth.
Although some economists have said the worst of China’s regulatory crackdown is over, they also said it doesn’t mean a reversal or an end to new rules.
It will take time for the market to rebuild confidence, but it is not appropriate to be overly pessimistic right now, Xuan Wei, chief strategist of China Asset Management, said in a note. He added that there are opportunities in new energy and technological growth stocks.
China opening to foreign finance
While analysts assess Chinese stock performance, the mainland market increasingly offers business opportunities for international investment firms.
The financial industry is one of the few areas in which Beijing has relaxed ownership restrictions in the last few years. The policy changes have allowed BlackRock, Goldman Sachs and UBS among others to buy full control of their local securities or mutual fund operations.
“One of the reasons why we’re bullish is we work in an area where China has really opened up in a big, big way,” said Brendan Ahern, chief investment officer of KraneShares. The firm sells one of the primary U.S.-listed exchange-traded funds that tracks Chinese internet stocks, KWEB.
US stocks suffer biggest daily drop in almost two years
US stocks posted the biggest daily drop in almost two years as investors assess the impact of higher prices on earnings and prospects for monetary policy tightening on economic growth. The dollar and Treasuries gained amid a pickup in haven bids.
The selloff sent the S&P 500 down 4%, with the plunge in consumer shares surpassing 6%. Target Corp. tumbled more than 20% in its worst rout since 1987, after trimming its profit forecast due to a surge in costs. Shares of retailers from Walmart Inc. to Macy’s Inc. were caught in the downdraft. The Nasdaq 100 fell the most among major benchmarks, dropping more than 5% as growth-related tech stocks sank. Megacaps Apple Inc. and Amazon.com Inc. slid at least 5%.
Treasuries rose across the board, sending the 10- and 30-year Treasury yields down as much as 11 basis points. The dollar rose against all of its Group-of-10 counterparts, except the yen and Swiss franc. Gold caught bids in the move into havens.
The benchmark S&P 500 is emerging from the longest weekly slump since 2011, but any rebounds in risk sentiment are proving fragile amid tightening monetary settings, Russia’s war in Ukraine and China’s Covid lockdowns.
In some of his most hawkish remarks to date, Federal Reserve Chair Jerome Powell said Tuesday that the US central bank will raise interest rates until there is “clear and convincing” evidence that inflation is in retreat. Chicago Fed President Charles Evans said Wednesday he sees a half-point rate increase at next month’s meeting and “probably thereafter.”
In Europe, new-vehicle sales shrank for a 10th month in a row as the industry remains mired in supply-chain crises, while euro-area inflation plateaued at a record high. Meanwhile, UK inflation rose to its highest level since Margaret Thatcher was prime minister 40 years ago, adding to pressure for action from the government and central bank.
Netflix lays off 150 employees due to slow revenue growth and business needs
Netflix is reportedly laying off nearly 150 employees in the coming days due to disappointing earnings and slow revenue growth.
According to a Variety report, the Amazon Prime Video rival might also terminate its contract with contractual contributors.
The layoffs are about 2 per cent of Netflix’s US workforce. “As we explained [in reporting Q1] earnings, our slowing revenue growth means we are also having to slow our cost growth as a company. So sadly, we are letting around 150 employees go today, mostly U.S.-based,” a Netflix spokesperson said.
The statement further revealed that the decision was primarily driven by business needs rather than individual performance. Netflix reported $7.87 billion in Q1, which was short of Wall Street’s estimates of $7.93 billion.
The report further reveals that nearly 70 part-time employees in Netflix’s animation studio will have to pack up and leave. A report by The Verge stated that about 26 contractors working on Netflix’s fan-focused Tudum website might see a termination.
“A number of agency contractors have also been impacted by the news announced this morning. We are grateful for their contributions to Netflix,” the company said.
Netflix, in its recent earnings call, revealed that it lost thousands of subscribers, which is a first for the company in over a decade.
The company expects to lose an additional 2 million in the next quarter due to the ongoing war between Russia and Ukraine. Netflix has shut shop in Russia following the country’s invasion of Ukraine.
Dollar breaks N600/$ ceiling ahead of party’s presidential primaries
Less than two weeks to the presidential primaries of the political parties ahead of the 2023 elections, the US dollar has broken the N600/$ mark at the parallel market and set the tone for a possible uptick in the coming days.
The black market rate had traded between N570/$ and N590/$ since the beginning of the year while the Central bank of Nigeria (CBN)’s intervention at the Nigerian Autonomous Foreign Exchange (NAFEX) has kept its rate under N420/$.
With the latest slump of the naira, the arbitrage between the parallel and NAFEX, which is regarded as the official window, is now inching close to N200/$. The spread measures the deviation of the controlled official rate from the real rate of exchange, with experts calling for liberalisation of the market to enable naira to find its true value.
The World Bank and the International Monetary Fund (IMF) have also warned of the repercussions of sustaining an artificially high naira while calling on the CBN to embark on market reform.
But the CBN has maintained that Nigeria, with the current high level of importation and underperformance of the industrial sector, cannot afford to float the naira completely as the exchange rate could spill out of control.
At the Lagos street market, yesterday, naira traded between N595/$ and N600/$ band. With the presidential primaries of the two leading political parties scheduled for Abuja next weekend, there is an expectation the demand pressure has not peaked, suggesting that naira is in for a protracted pressure.
At peer-to-peer (P2P) trading platforms, the dollar has been trading above N600 in the past three weeks, which had signaled that the black market rate could break through the psychological ceiling.
With that eventually happening, naira could be on a renewed free fall.
But there is also hope that it is a season to offload warehoused hard currencies for political campaigns to possibly shore up supply.
Experts are not sure where rising demand and supply of foreign exchange would lead the naira to, but the interplay between the movements of the two variables is a key factor in predicting the value of the naira in the tense political season. Godwin Owoh, a professor of applied economics, advised Nigerians to prepare for a steeper fall of the local currency, saying partisan politics and intra-party meetings, which are highly dollarised would bring much pressure to bear.
The CBN has promised to continue to protect the naira but its ability could be constrained by the equally falling reserve. For the first time in eight months, the gross reserves dropped below N39 billion on Monday, when CBN data put the figures at N38.92 billion. Effectively, the country’s reserves have depleted by $160 billion year-to-date.
Bismarck Rewane, an economist, had projected the reserve to collapse to $32 billion in the year as he expected the CBN to spend $8 to $10 billion defending the naira, which is taking much pressure from excessive importation.
The value of Nigeria’s imports increased by 64 per cent last year to N20.84 trillion. Sadly, the value of exports increased at a slower rate – 51 per cent – to N18. 91 trillion in the same period. The falling reserves and rising imports have put the apex bank in dire straits in its efforts to continue to defend the naira.
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