BofA Identifies a Turning Point in Supply-Demand (Order Flow)
The significance of Bank of America’s (BofA) analysis, reported by Maeil Business Newspaper’s securities desk on the 28th, is not that Chinese stocks are poised for an imminent rally. Rather, global equity funds returned their China allocations to benchmark-neutral in June after maintaining underweight positions for the previous four years—meaning one source of selling pressure that had weighed on prices has weakened.
A benchmark-neutral position means a fund holds Chinese equities at roughly the same weighting as its benchmark index. While this is not the same as actively increasing exposure, the supply-demand (order flow) backdrop has shifted because structural selling has stopped. What is evident now is not strong conviction to buy, but receding pessimism.
How 2,800 Global Funds Returned to Neutral
BofA strategist Nigel Tupper analyzed 2,800 global funds holding a combined $562 billion, or approximately 765 trillion won, in Chinese equities. Although publicly available data do not disclose individual funds’ holdings or transactions, the scope of the assets analyzed makes it difficult to dismiss the shift as a decision by only a small number of asset managers.
What this really signals is a normalization of positioning. When funds are underweight, persistent selling can prevent valuations from recovering even as earnings improve. If neutral positioning holds, corporate earnings will carry greater weight in stock-price assessments; if funds return to underweight positions, supply-demand (order flow) pressure will reemerge first.
Bloomberg Intelligence Confirms ETF Shift to Net Inflows
According to Bloomberg Intelligence, ETFs focused on Chinese and Hong Kong equities recorded net outflows of $1.94 billion in July before shifting to net inflows of $19 million in August. The key point is not the amount itself, but the change in the direction of fund flow. Fund positioning and ETF flows have begun pointing in the same direction.
Bloomberg Intelligence analyst Rebecca Sin said the substantial underweighting of Chinese equities relative to other major emerging markets appears to be nearing a bottom, while the factors that had driven selling are beginning to lose momentum. However, flows for individual ETFs were not provided. It is therefore too early to determine whether buying is broad-based or concentrated in a limited number of products.
What the MSCI China Index’s 10.2 Times Multiple Says About Valuation
The MSCI China Index trades at approximately 10.2 times 12-month forward earnings, below its 10-year average of 11.7 times. What the market has already priced in is a prolonged valuation discount. What remains difficult to regard as priced in is whether earnings improvement will persist and whether global investors will move from neutral positioning to an overweight allocation.
A low P/E ratio creates room for a rerating but does not guarantee gains by itself. In this environment, the combination of supply-demand (order flow) and earnings will determine the market multiple. Continued inflows and a recovery in corporate profits would strengthen the conditions for the discount to narrow, but if either falters, valuations could remain low.
Where Shanghai-Listed Companies’ Profits Meet Selective Buying
According to the Shanghai Securities News, first-half net profit at companies listed on the Shanghai Stock Exchange rose 17.6% year over year. This figure provides a basis for global investors’ attention to shift from positioning toward corporate earnings. The usual transmission mechanism is that a market supported by both improving supply-demand (order flow) and rising profits can sustain valuations more readily than one driven by order-flow changes alone.
Allspring Global Investments portfolio manager Gary Tan said selling pressure on Chinese equities is passing its low point and investors are shifting their focus toward corporate earnings. Allspring Global Investments is also selectively adding to its Chinese equity holdings. This approach is closer to distinguishing companies by earnings than expressing broad optimism about the overall market.
Implications for Chinese Stocks and ETFs
- Chinese stocks: If global funds maintain benchmark-neutral positions, the structural underweight pressure seen over the previous four years will ease. As broader buying has not yet been confirmed, an improvement in supply-demand (order flow) should not be confused with a bullish outlook.
- Chinese and Hong Kong equity ETFs: If the shift from net outflows in July to net inflows in August continues, direct demand for investment capital will strengthen. A return to net outflows would leave this change as only a brief reversal.
- MSCI China Index: With its 12-month forward P/E ratio below the 10-year average, there is still room for the valuation discount to narrow. Without support from corporate profits, however, a low multiple alone would be insufficient to justify a rerating.
What Korean Investors Should Monitor Next
- Determine whether global funds maintain benchmark-neutral China allocations or move to overweight positions.
- Check whether Chinese and Hong Kong equity ETFs continue recording net inflows after August.
- Watch whether the MSCI China Index’s 12-month forward P/E ratio and corporate earnings improve together.
- Assess whether growth in net profit among Shanghai-listed companies continues in the next earnings season.
Downside Conditions to Watch Before Treating This as a Bullish Signal
The optimistic scenario requires neutral positioning, sustained ETF net inflows, and improving corporate profits to move together. Under those conditions, easing selling pressure could translate into a narrowing valuation discount. Bloomberg also assessed that while the shift does not guarantee further gains, it has removed one obstacle that had hindered a recovery in share prices.
The risk is that the change in direction remains shallow. ETF net inflows are smaller than the preceding outflows, and transaction-level data for the funds analyzed are unavailable. The next turning point will depend not on vague optimism, but on whether neutral weightings, ETF fund flow, and listed companies’ profits continue moving in the same direction.
This article was automatically summarized and analyzed based on the original news report. View the original article (Maeil Business Newspaper Securities)
