China Goes to Underweight as Inflows Decline, Citigroup Says

By Chen Shiyin

June 1 (Bloomberg) -- A decline in China fund inflows means investors are holding fewer of the nation’s equities in their Asian funds than suggested by global benchmark indexes, Citigroup Inc. said.

Investors are now 25 basis points underweight in China after new money into the nation’s funds dropped to $19 million last week, Citigroup said, citing data from EPFR Global. Chinese funds had added an average of $484 million each week during the previous four weeks, the brokerage added.

The Hang Seng China Enterprises Index, which tracks the H shares of Chinese companies, has gained 35 percent this year, while the Shanghai Composite Index has risen 48 percent. Still, the mainland benchmark index added 6.3 percent last month, lagging behind the 14 percent rally in the MSCI Asia-Pacific excluding Japan Index.

“China has gone from one of the most overweight markets in February to 25 basis points underweight,” Citigroup analysts Elaine Chu and Markus Rosgen said in a May 29 report.

Cambridge, Massachusetts-based EPFR said on May 28 that emerging-market equity funds added $2.1 billion in the week to May 27. Funds that invest in emerging-market stocks worldwide attracted $1 billion. Asia equity funds excluding Japan gained $647 million, the research company wrote in its May 28 report.

Taiwan, Indonesia Favored

As China loses favor, global investors have become more positive on Taiwan and Indonesia, Citigroup said. Taiwan’s “underweight” level has narrowed by 100 basis points to the smallest in 13 months, while Indonesia has moved from “neutral” to rank with Hong Kong among the top two most “overweight” markets in Asian funds, according to the brokerage.

Benchmark stock indexes in Taiwan and Indonesia markets rose 15 percent and 11 percent, respectively, in May.

“Historically, once the consensus moves a country from neutral to Top-2, it outperforms the region by 10 percentage points in the next six months and 20 percentage points in 12 months,” the Citigroup analysts wrote.

To contact the reporter on this story: Chen Shiyin in Singapore at schen37@bloomberg.net