Wall Street Piles Into Bulletproof Corner of China Stock Market

Offshore shares trade at record premium to those onshore
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Downbeat mood has held back China’s local equities since 2015
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If international investors harbor anxieties over China’s trade spat with the U.S., rising corporate defaults or tighter monetary policy, it’s not showing in the equity market.

The MSCI China Index is on course for a sixth quarter of gains, the longest winning streak since its creation a quarter century ago. It’s remained pricier than shares in Shanghai all year -- a rare premium that’s near the widest on record -- and trades at the highest level relative to other emerging markets since the 1990s.

The resilience of the benchmark, which consists mainly of Chinese firms listed in New York and Hong Kong, contrasts with a more downbeat mood that permeates China’s domestic equity market. While local shares have struggled to recover from the bursting of 2015’s bubble, overseas investors are encouraged by the country’s solid economic growth, stable currency and greater resistance to U.S. rate decisions.

“Among global investors, there’s a rising sense that under the current Fed rate hike cycle, China will be last EM standing given its overall macro stability,” Wendy Liu, head of Nomura’s China equity research, said from Singapore. “This view is being expressed in an exposure to the MSCI China.”

Read more on what strategists are saying about emerging markets

The MSCI China Index hasn’t always given equity bulls an easy ride this year. A large tech weighting -- a characteristic that helped it jump 52 percent in 2017 -- turned into a curse when giants like Tencent Holdings Ltd. and Alibaba Group Holding Ltd. sold off in February. While trade tensions weighed on the index earlier in the year, its latest four-day rally in the face of more tariff threats shows investors aren’t too concerned about that now.

Adding to the buoyant sentiment, strategists at Nomura Holdings Inc., Deutsche Bank AG and Goldman Sachs Group Inc. have all stuck with their bullish calls on the MSCI China gauge this week.

For all the excitement around how MSCI Inc.’s embrace of the A-share market would help trigger a rally on the mainland, last week’s inclusion did little to reverse its lagging performance.

One possible positive for onshore stocks is the national team, as Chinese state funds are called, which occasionally steps in to support the market during downturns. Bank of America Corp. strategists said Monday they prefer mainland large caps over their offshore peers because A shares enjoy a government “put.”

Even so, China’s offshore stocks are far more tranquil. The MSCI China Index is about 12 percent less volatile than the Shanghai Composite, according to 50-day volatility data. Only a full-blown trade conflict with the U.S. should deter international investors from buying Chinese shares, according to Deutsche Bank.

Nomura’s Liu isn’t quite so sanguine.

“We’ll know in the coming weeks or months if the current calm view on U.S. and China trade in the capital market turns out to be a bit complacent,” she said.