Macroscope | Donald Trump has given Chinese stocks a major boost

The Hang Seng China Enterprises Index entered a bull market in June, rising 22% since April, outperforming major equity markets this year. This rally is attributed to factors including global investors' underweight positions in Chinese equities and a shift away from the perception of US exceptionalism due to concerns over trade policies and rising public debt. Analysts at Morgan Stanley, Nomura, and Goldman Sachs suggest this trend favors Chinese equities, as investors seek diversification and the yuan strengthens.

Analysis

Chinese equities have demonstrated significant outperformance, with the Hang Seng China Enterprises Index (HSCEI) entering a bull market on June 9 after a 22% rally since its April 7 low, and both the HSCEI and MSCI China Index leading other major global equity markets this year. This rally is particularly noteworthy given it has occurred amidst persistent deflationary pressures, low consumer confidence, an ongoing property sector crisis within China, and escalating US-China trade tensions. Key drivers behind this resurgence include global investors rectifying their 'deeply underweight' positions in Chinese equities, which Morgan Stanley identifies as creating 'sizeable allocation upside potential.' Furthermore, a diminishing conviction in 'US exceptionalism,' fueled by concerns over US trade policies, disregard for the rule of law, and rising public debt under President Trump, is prompting a shift towards portfolio diversification away from US assets. Morgan Stanley notes a 'higher willingness to add more positions in Chinese equities, fuelled by global diversification demand,' while Nomura suggests the fading 'US exceptionalism' theme could benefit Asian equities, positioning China, India, and Japan to capture these 'reallocation flows.' Goldman Sachs also points out that Chinese stocks historically perform well during periods of yuan strengthening against the US dollar, a relevant factor as investors seek alternatives.

Key Decisions for Investors

• Investors should re-evaluate their exposure to Chinese equities, considering the observed market rally and the potential for further upside as global portfolios shift from historically underweight positions.
• Monitor the trend of capital reallocation away from U.S. assets towards markets like China, driven by diversification demands and concerns over U.S. economic policies, as this could sustain current momentum in Chinese stocks.
• Consider the strengthening yuan against the U.S. dollar as a potential tailwind for Chinese equity performance, while remaining cognizant of the underlying domestic economic challenges in China despite the positive market sentiment.