CICC: How are top global institutions allocating Chinese equities in the second quarter?

In the second quarter, the Chinese market experienced a rebound, especially in the Hong Kong stock market, where the Hang Seng Index rose nearly 20% within a month at the end of April. There was speculation about the return of long-term value-based overseas funds. However, this rebound was not sustained, as the market weakened again in late May, giving back most of the gains. Overall, in the second quarter, the MSCI China index rose by 6%, the Hang Seng Index rose by 8%, and the Shanghai Composite Index fell by 4%. Data from EPFR and Northbound funds show that overseas funds continued to flow out, with Northbound funds flowing out 29.7 billion yuan in the second quarter, while EPFR overseas active fund flows out 4.3 billion US dollars (approximately 30.4 billion yuan), depicting more of a long-term value-based fund outflow. Looking back, as analyzed in multiple reports such as "The Driving Force and Space of this Rebound," the previous rise was largely driven by speculative funds such as hedge funds, and the Hang Seng Index eventually retreated after reaching the first-stage target of 19,000-20,000 points that we had suggested. In addition to the discussion of fund flows mentioned above, how has the holding situation of Chinese stocks changed for top overseas asset management institutions? We summarize and analyze the holding information disclosed by major overseas institutions in the second quarter as follows. Overall holding: Rebound in the market led to an increase in the size of holdings, but the magnitude was smaller than the market's increase, indicating possible reductions in holdings. The holdings increased in the second quarter, but the increase was smaller than the market's rise. 1) Overseas asset management institutions (active + passive) held Chinese stocks worth $618.9 billion in the second quarter, a slight increase of $18.7 billion (+3.1%) from the first quarter, less than the 5.8% increase in the MSCI China index during the same period, indicating a certain level of reduction in holdings; 2) Focusing on active institutions, the market value of Chinese stocks held increased by 2.5% to $444.4 billion (compared to $433.6 billion in the first quarter), a smaller increase than the overall, further proving this point; 3) The proportion of Chinese stocks in the assets of overseas asset management institutions remained at 1.2%, unchanged from the first quarter, and still at its lowest level since 2016. By region, institutions in the United States, Hong Kong, and the United Kingdom may be reducing their holdings, while institutions in Singapore are increasing their holdings. Compared to the first quarter, US asset management institutions held Chinese stocks valued at $305.7 billion, a 3.4% increase from the $295.6 billion in the first quarter, Hong Kong institutions (excluding Chinese institutions) increased their holdings by 1.2% to $101.9 billion, and UK holdings increased by 2.4% to $111.3 billion, all lower than the market's rise, indicating that institutions in these regions may still be reducing their holdings. In contrast, institutions in Singapore and Taiwan increased their holdings by 19.7% and 6.4% respectively in the second quarter, significantly higher than the overall market increase, suggesting some level of increase in holdings. [Charts and data follows in the original text] Holding structure: Increased holdings in Chinese concept stocks, reduced holdings in A-shares and Hong Kong stocks; increased holdings in essential retail, automotive, and automotive parts, reduced holdings in biopharmaceuticals, business services, and raw materials. Focused on the top 20 active asset management institutions (holding 62% of Chinese stocks), the holding of Chinese stocks increased to $382.8 billion in the second quarter, a 4.4% increase from $366.7 billion in the first quarter, better than the overall findings mentioned above. Further analysis of their holding behavior reveals the following: Across markets: Reduction in A-shares and Hong Kong stocks, but increased holdings in Chinese concept stocks. These institutions increased their holdings of Hong Kong and Chinese concept stocks by 7.1% and 1.7% respectively in the second quarter, but their holdings of A-shares declined by 5.9%. Excluding price factors (2Q24 unchanged price change in number of shares), we estimate that these top institutions' holdings of A-shares and Hong Kong stocks declined by 0.8% and 0.6% respectively in the second quarter, but their holdings of Chinese concept stocks increased by 0.6%. Similarly, calculated at unchanged second-quarter prices, in the holdings of Chinese stocks by these institutions, the proportion of Chinese concept stocks increased slightly from 18.9% in the first quarter to 19.1%, while the proportions of A-shares and Hong Kong stocks both slightly decreased to 23.4% and 57.5% respectively. Industry preferences: Reduction in biopharmaceuticals, business services, and raw materials; increased holdings in essential retail, automotive, and automotive parts. Excluding price factors, we estimate that the top asset management institutions reduced their holdings of biopharmaceuticals (-8%), business and professional services (mainly related to environmental protection, office services, etc., -7%), raw materials (-6%), utilities (-6%), and semiconductor products and equipment (-6%); and increased their holdings of essential retail (+19%), automotive, and automotive parts.Real estate management and development (+9%) and household and personal goods (+5%) and so on. In terms of allocation levels, foreign holdings have the highest proportion in media and entertainment (20.4%), optional retail (13.9%), consumer services (12.0%), and capital goods (6.7%); by comparison, telecommunications services (0.2%), business and professional services (0.2%), and household and personal goods (0.4%) have the lowest proportion.Heavy positions in individual stocks: Among the top 20 heavy positions, 18 new stocks have entered the list; BYD Company Limited, Meituan, etc. increased their holdings significantly, while Alibaba and others reduced their holdings the most. In the second quarter, the top 20 heavy positions of the above-mentioned leading asset management institutions in China totaled 123 stocks, an increase of two stocks from the first quarter. Specifically, 18 stocks entered the top 20 heavy positions of the above-mentioned institutions, including Luxshare Precision Industry, Zhongji Innolight, Zhuzhou CRRC Times Electric, Tsingtao Brewery, BYD Company Limited, HANSOH PHARMA, Hisense Home Appliances Group, Tengsheng Pharmaceutical, CHINA TOWER, BYD ELECTRONIC, SENSETIME-W, SG Micro Corp, CITIC, Hongfa Technology, CHINA RE, ENN Natural Gas, and Yangtze River, among others. On the other hand, 16 stocks that were in the top 20 heavy positions in the first quarter did not enter this time, including Beijing Kingsoft Office Software, Inc, Luzhou Laojiao, Ideal Automobile, XINYI SOLAR, Advanced Micro-Fabrication Equipment Inc. China, CDB LEASING, Shanghai Putailai New Energy Technology, Chacha Food, Shandong Linglong Tyre, Yifeng Pharmacy Chain, HAITIAN INT'L, among others. In terms of individual stocks, from the perspective of unchanged prices in the second quarter of 2024, foreign funds increased their holdings the most in BYD COMPANY, Meituan, and Beike, while Alibaba and Tencent reduced their holdings significantly. Graph 9: In the second quarter, the total holdings of A-shares among the top active foreign institutions decreased by 5.2% compared to the previous quarter, but increased by 7.7% in Hong Kong stocks and 1.0% in Chinese concept stocks. Data source: FactSet, CICC Research Department Graph 10: In terms of allocation, in the second quarter, foreign holdings of Hong Kong stocks and A-shares accounted for 58% and 23% of the total holdings of Chinese stocks by foreign investors, respectively. Data source: FactSet, CICC Research Department Graph 11: In the second quarter, foreign investors mainly increased their holdings in real estate and essential consumption sectors, while reducing their positions in raw materials and utilities. Data source: FactSet, CICC Research Department Graph 12: In terms of specific industries, there were major reductions in biopharmaceuticals, commerce and professional services, and raw materials, but increased positions in essential retail and automotive parts. Data source: FactSet, CICC Research Department Graph 13: In the second quarter, the allocation of foreign investors in the optional consumption and communication services sectors was relatively high. Data source: FactSet, CICC Research Department Graph 14: In further detail, the allocation percentages were highest in media and entertainment, e-commerce and retail, consumer services, and food and beverage sectors. Data source: FactSet, CICC Research Department Graph 15: Top active foreign management institutions' heavy positions in Chinese stocks in the second quarter of 2024. Data source: FactSet, CICC Research Department Graph 16: Top active foreign management institutions' heavy positions in Chinese stocks in the first quarter of 2024. Data source: FactSet, CICC Research Department Graph 17: Adjusted holdings of top active foreign management institutions in the second quarter of 2024, excluding stock price factors. This article is reprinted from Zhongjin Insight, edited by Chen Wenfang.