Analysis of China’s Stock Market Trends

According to Citi analysts, China’s least crowded stocks have outperformed their popular counterparts in the recent market rally.

Key Insights

A shift in investor sentiment, sparked by a stronger-than-expected policy change in China, has resulted in a reversal of underweight positions. This has led to gains in underinvested sectors and stocks.

Citi reported that the least crowded stocks in the MSCI China index have rallied by 25%, significantly outstripping the 15% returns of the most crowded stocks.

Performance Overview

Nearly all stocks in the CSI 300 index experienced an increase this week, with the index up over 15% in the last four days, and there has been an increase in new long positions on China A50 futures.

This performance highlights how underinvested stocks are the primary beneficiaries of recent policy changes, as foreign investors reallocating their portfolios show interest.

Shifts in Investment Patterns

Over the past year, investors have been heavily invested in Indian stocks while being underweight in Chinese stocks. This trend led to a strong inverse relationship between foreign investment flows into India and China. With China’s market rebounding, some investors might take profits from Indian stocks to invest in Chinese equities.

Caution Advised

However, there are risks associated with the current market momentum. Citi noted that “Price Momentum is Fragile” due to extreme positions being underweight in China and overweight in India. As such, investors should remain cautious about the potential for sudden shifts in momentum.

Recommendations

For those looking to benefit from this trend, Citi advises screening for underinvested Chinese stocks and developed market stocks with significant exposure to China to capture further gains.