GLOBAL long-only funds offloaded China equities at the fastest pace of 2023 in December as they rushed to meet redemption requests and to diversify away from the world’s second-largest economy, according to Morgan Stanley analysts.

China and Hong Kong equities saw a combined net outflow of US$3.8 billion from active long-only managers last month, the worst month in 2023 and the third-largest monthly outflow on record, Morgan Stanley’s quantitative research team said in a report released to clients on Tuesday (Jan 2).

“Both investors’ redemptions from equity funds and portfolio managers’ rebalancing to deepen underweight on China contributed to the outflows,” the analysts led by Gilbert Wong said.

China and Hong Kong stocks ended 2023 as the worst performers among the world’s major indexes, dragged down by geopolitical risks, a sluggish economic recovery and policy uncertainties.

China benchmark blue-chip CSI300 Index slumped 11 per cent in 2023 while Hong Kong’s Hang Seng Index tumbled 14 per cent.

While Beijing rolled out a raft of measures aimed at boosting the economy in recent months, analysts have said the moves are not sufficient to restore market confidence.

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Morgan Stanley says European fund managers were “catching up to align their underweight on China” with their US peers.

Of the US$3.8 billion outflow in December, US$2 billion was attributable to investor redemptions from funds, while the rest was driven by fund managers rebalancing out of the country, the investment bank said.

In 2023, Tencent Holdings, Alibaba Group Holdings, Kweichow Moutai and Netease topped the weight additions list, while JD.com, Yum China Holdings and AIA were the most sold, according to Morgan Stanley.

Long-short equity funds, in contrast with their long-only counterparts, appear to have seen more value in Chinese stocks in December.

UBS’ prime brokerage team said China equities were well bought by hedge funds over the final few weeks of 2023 because they were betting on a stimulus surprise and actively bought the dips. REUTERS