ORLANDO, Fla., May 17 (Reuters) – Japan is long, China is short.
If macro relative value trading is currently underway, it may be as the contrasting fortunes of Asia’s economic and financial giants grow more difficult by the day.
China’s economy is rapidly losing momentum and investor appetite for Chinese assets has cooled accordingly, while Japan’s growth is accelerating and major stock markets have hit or surpassed 33-year highs. ing.
Some of these trends are not new. Foreign investors have been selling Chinese government bonds for more than a year, and the deterioration in U.S.-China relations has similarly long haunted investors. But this week’s wildly diverging economic data has highlighted the trend.
First, China’s investment and retail sales fell short of economists’ expectations in April, industrial production growth was just half of what economists expected, and foreign direct investment growth was less than half what it was in March.
China’s economic surprise index posted its biggest drop in two years and record on Tuesday after last week’s data showed inflation and imports collapsing in April.
The growth outlook has darkened rapidly and significantly, with Barclays economists Wednesday cutting their second-quarter GDP forecast to 1% from 5% and their full-year forecast to 5.3%. Even the Chinese government’s official target of 5% for 2023 will be the lowest in more than 30 years, barring the disruption caused by the 2020 pandemic.
Analysts at Societe Generale on Wednesday revised their forecasts for the yuan, expecting the yuan to depreciate to 7.30 to the dollar this year. This is the lowest level in 15 years.
Meanwhile, Japan’s official data on Wednesday showed Asia’s second-largest economy grew four times faster than expected on a quarterly basis to 0.4% in the first quarter and more than doubled to 1.6% annualized. .
Also this week, Japan’s benchmark Nikkei 225 stock index closed above the psychologically important 30,000-point mark for the first time in 20 months and is now within a few percentage points of the level it last reached in 1990. .
On Tuesday, the broader Topix index hit a 33-year high.
Goldman Sachs analysts say foreign investors have been net buyers of Japanese stocks for the past five weeks, but cumulative flows have just returned to last summer’s levels.
There is plenty of room for more buying.
“If you look at the longer term, you can see that foreign investors are selling Japanese stocks by a considerable margin. Upside risk for stocks,” he wrote in a memo.
Bank of America’s latest survey of fund managers paints a similar picture. A net 11% of the companies surveyed are underweight Japanese equities, 0.7 standard deviations below the long-term average.
Compare that to China.
Indeed, foreign investors were close to $30 billion in net Chinese stock purchases earlier this year, but most of that was in January, when the market surged as COVID-19 restrictions were lifted.
But that explosive optimism about reopening post-coronavirus has faded. Non-residents sold nearly $4 billion in Chinese stocks in April, the first outflow in six months, according to the Institute of International Finance.
Bank of America’s monthly survey of fund managers found that the most crowded global trade in January was “long” in Chinese stocks. Its size has been significantly reduced, and investors have reduced their net overweight positions in Chinese stocks, but remain comfortably net overweight.
If investors have room to increase their exposure to Japanese stocks, they also have room to reduce their exposure to China.
Fixed income investors, meanwhile, are voting right now. A decade of strong and steady inflows into Chinese bonds was reversed with Russia’s invasion last February, but foreigners are showing no signs of giving in to temptation.
The upcoming actions by the Bank of Japan (BOJ) and the People’s Bank of China (PBOC) could also help reinforce these trends.
If the BOJ starts to lift its ‘yield curve control’ policy, perhaps as early as next month, as it lowers inflation, the yen could appreciate and Japanese investor flows could return to domestic assets. .
Given the fragile growth situation and geopolitical tensions surrounding Taiwan, Ukraine, tech espionage and sanctions, the People’s Bank of China faces a more difficult task of attracting investors to China.
The upcoming G7 summit in Japan will likely address these issues, and the joint statement will likely include a section on China. But how direct the language will be remains to be seen. Japan and Germany are major exporters to China and may be skeptical about signing investment restrictions in the world’s second largest economy.
But investors have made their position pretty clear.
(Opinions expressed here are those of the author, a Reuters columnist.)
By Jamie McGever.Editing: Jamie Freed
Our criteria: Thomson Reuters Trust Principles.
Opinions expressed are those of the author. They do not reflect the views of Reuters News as committed to honesty, independence and freedom from bias based on trust principles.