Downshifting to neutral on China equities

IN anticipation that the market would merely perform in line with the emerging market (EM) equity complex in the next three to six months, we have decided to neutralise our positive view on China equities.

At the same time, the bank has decided to take profit on our equities overweight that has been in place since November, reducing the allocation to EM equities - and equities overall - to neutral.

We turned positive on China equities in June 2020, thereby capturing a significant portion of the subsequent equity rally. However, in the last few weeks the market has sold off due to a few factors: authorities' concerns over asset price bubbles, leading to fears of tighter liquidity conditions; a fierce, reflationary rotation into value stocks which has hurt China's disproportionately large tech sector; and, moderating southbound capital flows following a compression in the price difference - and valuation - between local and international markets.