Foreign investment banks suggest "over allocation" of many Chinese assets and strong "gold absorption" of overseas ETFs

On January 5, the three A-share indexes opened higher, and the Shanghai index gained three consecutive positive returns in the New Year. Behind the strong market is the continuous inflow of funds. Recently, foreign capital has been flowing into China's asset ETFs, and many overseas ETFs have reached new heights in scale.
"Overallocation" of Chinese assets has become the consistent choice of many foreign investors. According to Credit Suisse's 2023 annual strategy report, A-share is at the bottom for many years. It is estimated that MSCI China Index, Hang Seng Index and CSI 300 Index will have more than 20% of the annual growth space in 2023. Meng Lei, China equity strategy analyst at UBS Securities, believes that the total market return may reach 25% to 30% in 2023.
The trading volume of many overseas Chinese asset ETFs soared. As of January 4 local time, KraneShares China's overseas Internet ETF assets reached US $6.512 billion, an increase of more than 60% from US $3.939 billion at the end of October 2022. The asset size of MSCI China's ETF, the world's largest Chinese stock ETF, climbed to US $7.721 billion, more than 50% higher than US $5.076 billion at the end of October last year. The constituent stocks of MSCI China ETF include Tencent, Alibaba, JD and other Internet giants, as well as China Construction Bank, Ping An, Industrial and Commercial Bank of China and other financial stocks.
According to CITIC Securities, foreign capital will return to the Hong Kong stock market from late November 2022. According to the calculated custody data, as of December 23, foreign capital had flowed into the Hang Seng Composite Index for about HK $14.9 billion that month. With the gradual reversal of overseas investors' expectations of domestic policies, foreign capital is expected to continue to return to Hong Kong stocks in 2023.
Since the fourth quarter of last year, the inflow of funds from the north has also accelerated, including more than 35 billion yuan in December alone. In 2023, the northward capital continued to flow in. On January 5, the total net purchase exceeded 12.7 billion yuan, the largest single day net purchase since November 14, 2022.
Gao Ting, chief strategic analyst of Nomura Orient International Securities Research Department, predicted that the process of the Federal Reserve's interest rate increase would soon come to an end, and that the stage of substantial appreciation of the U.S. dollar had passed, which was beneficial to emerging markets. "We judge that China's economic recovery will be more obvious in 2023, especially after the second quarter. The scale of capital inflows from the north is likely to increase compared with 2022, and foreign capital is expected to become the liquidity highlight of the whole year."
Due to the high expectation of China's economic recovery in 2023, most international investment banks believe that global funds will seek opportunities from the Chinese market with low valuation, high growth rate and supportive monetary policy.
Credit Suisse's Chinese market strategy in 2023 believes that A-share valuation is still attractive and at the bottom for many years. Credit Suisse expects that the Hang Seng Index and the CSI 300 Index will have more than 20% of the current upside.
UBS Securities is also very optimistic about the performance of A-shares in 2023. Meng Lei, China equity strategy analyst at UBS Securities, believes that economic recovery and other factors will promote the growth rate of weighted average earnings per share of constituent stocks of the CSI 300 Index from 4% in 2022 to 15% in 2023.