Strategy Note /

China equities foreign inflows resume, bucking large Asia EM trend

  • Foreign inflows into China equities resumed in April, suggesting the list of fundamental concerns is well understood

  • China contrasts with Taiwan, India and South Korea, the other largest markets in EM, where large outflows persist

  • China has space for stimulus and valuation suggests more sensitivity to positive than negative news on tech, debt, Covid

China equities foreign inflows resume, bucking large Asia EM trend
Hasnain Malik
Hasnain Malik

Strategy & Head of Equity Research

Tellimer Research
11 May 2022
Published byTellimer Research

Monthly foreign inflows into China equities resumed in April, after a large outflow in March, and in contrast with Taiwan, India and South Korea, the other biggest markets in EM, where large outflows persist.

China equities (Shanghai Composite index) is the worst performer in large EM ytd, with around a 40pps underperformance versus top performer Saudi Arabia.

But low valuation relative to history suggests that positive news on the long list of fundamental concerns may spark a bigger response in asset prices than further negative news.

China equities buck the trend in foreign fund flows

List of well-known negatives

This may suggest that the following list of fundamental concerns might be well understood, already reflected in valuation, and that investors may react more to positive than negative news:

On the positive side, China has the following in its favour:

  • Policy stimulus capacity, which is very rare in EM, with a real interest rate of positive 0.8% (compared with negative 2.6% in India) and gross government debt/GDP of 78% (compared with 87% in India);

  • Cheaper valuation relative to history compared with peers in EM, eg trailing PB is on a c15% discount to the five-year median, albeit there is 5% FX rate downside should REER revert to its 10-year median (the equivalent respective figures for India are c15% premium and 4% downside, and for Saudi Arabia a c55% premium and 5% downside); and

  • Very low representation in global equity indices compared with the size of its market cap (by a factor of c2.5x) or GDP (c5x).

China positive real interest rate implies room for stimulus

China-HK equities among cheapest vs history in large EM

China still under-represented in global equity indices

China tops our EM Country Index scores

China is the highest-ranked out of c50 emerging equity markets in our Tellimer EM Country Index.

Our index weights c30 factors on growth (short and long term), policy credibility, politics, sanctions, ESG, equity valuation and liquidity.

The weights in the index can be changed in order to model different global themes and portfolio styles.

China's score receives a huge boost from its order-of-magnitude higher equity market liquidity but it retains top spot even when stripping this out.

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