Wall Street bets Chinese stocks will extend $2.4 trillion rally

Core Viewpoint - Investor perception toward China has shifted positively, recognizing its market potential driven by technological advancements and resilience, with a growing inclination to invest in Chinese equities [1][15]. Investment Trends - Foreign long-only funds have purchased approximately $10 billion in shares in mainland China and Hong Kong through November 2023, reversing a $17 billion outflow in 2024, primarily driven by passive investors [3][15]. - Active fund managers, however, have withdrawn around $15 billion due to lingering concerns over economic slowdown and regulatory crackdowns [3][15]. Market Sentiment - Many active investors remain cautious, influenced by years of economic anxiety, despite a more business-friendly stance from authorities this year [5][15]. - The bar for investing in China remains high, especially with the US market performing well, but improving earnings and addressing deflation could change this sentiment [6][15]. Growth Potential - The bullish outlook for Chinese stocks is supported by optimism surrounding technology sectors such as chips, biopharma, and robotics, alongside hopes of overcoming deflationary pressures [8][15]. - Stocks that have been affected by economic stability concerns may present significant investment opportunities if reflation occurs [9][15]. Valuation Comparisons - Chinese stocks are considered undervalued, with the MSCI China index trading at 12 times forward earnings, compared to 15 for MSCI Asia and 22 for the S&P 500 [11][15]. Future Expectations - Analysts predict modest returns for the MSCI China index, with expectations of around 6% to 9% gains in the coming year [11][15]. - Local mutual funds and state-linked funds are also contributing to market stability, indicating that foreign investment is not the sole driver of the rally [12][15]. Savings and Market Dynamics - Chinese households hold approximately $23 trillion in deposits, which could provide a significant boost to the market as investors seek better returns amid a struggling real estate sector [13][15]. - A potential resurgence in sentiment from mainland investors could further propel market growth [14][15].