Global long-only funds rapidly divested from China equities in December 2023, recording the highest monthly outflow of the year. This move, driven by redemption requests and a desire to reduce exposure to the Chinese market, resulted in a combined net outflow of $3.8 billion from China and Hong Kong equities. The challenging year for China’s stock market was influenced by geopolitical tensions, a sluggish economic recovery, and uncertainties in policies.
Key Points:
- Fastest Sell-Off of the Year: In December 2023, global long-only funds experienced an accelerated sell-off of China equities, with a combined net outflow of $3.8 billion. This marked the worst month for outflows in 2023 and the third-largest monthly outflow on record.
- Contributing Factors:
- Redemption Requests: Investor redemptions from equity funds played a significant role in the outflows.
- Portfolio Rebalancing: Portfolio managers actively rebalanced their portfolios to deepen underweight positions on China, adding to the overall outflow.
- Performance of China and Hong Kong Stocks: China’s benchmark blue-chip CSI300 Index slumped 11%, and Hong Kong’s Hang Seng Index tumbled 14% in 2023. Geopolitical risks, a slow economic recovery, and policy uncertainties contributed to the poor performance.
- European Fund Managers Aligning with U.S. Peers: Morgan Stanley suggests that European fund managers were catching up to align their underweight positions on China with their U.S. counterparts. The outflow in December reflected this alignment.
- Breakdown of Outflow: Of the $3.8 billion outflow, $2 billion was attributed to investor redemptions from funds, while the remainder resulted from fund managers rebalancing out of China.
- Top Weight Additions and Sales in 2023:
- Top Weight Additions: Tencent Holdings, Alibaba Group Holdings, Kweichow Moutai, and Netease.
- Most Sold: JD.com, Yum China Holdings, and AIA.
- Contrast with Long-Short Equity Funds: Unlike long-only funds, long-short equity funds appeared to find value in Chinese stocks in December. Hedge funds actively bought Chinese equities in the final weeks of 2023, anticipating a stimulus surprise and capitalizing on buying opportunities.
- Market Response: China and Hong Kong stocks’ poor performance in 2023 led to a negative market sentiment, impacting fund flows. The sell-off contributed to the overall challenges faced by the Chinese stock market throughout the year.
The significant sell-off of China equities in December 2023, driven by both investor redemptions and portfolio rebalancing, reflects the challenging environment faced by the Chinese stock market. Geopolitical risks, economic uncertainties, and policy challenges have created headwinds for investors. The alignment of European fund managers with their U.S. counterparts indicates a broader sentiment shift away from China, emphasizing the need for careful navigation in the current market landscape.
