Global investors are taking another look at Chinese equities after years of cautious positioning, drawn by relatively cheap valuations and opportunities in artificial intelligence, although an end to persistent selling does not indicate an outright bullish turn, according to analysts.

Global active long-only funds have raised their average allocation to Chinese equities to benchmark-neutral from underweight since June, according to a recent Bank of America analysis of 2,767 global funds. The change ended four years of underweight positioning, with the funds managing US$562 billion in Chinese stocks, the bank added.

Meanwhile, BlackRock remained neutral on Chinese equities but saw opportunities in physical AI, according to its fourth-quarter global outlook published in September. UBS Asset Management also said in a report published on October 1 that China remained “a key opportunity”, citing attractive valuations in selected sectors including technology, AI and advanced manufacturing.

“Chinese assets are likely to continue attracting greater attention from global investors,” said Kenny Ng, a strategist at Everbright Securities International. “Valuations, particularly in Hong Kong, remain relatively low, while external uncertainties remain elevated.”Risks including persistently high US Treasury yields, mounting US government debt, geopolitical tensions and the US midterm elections could increase market volatility, making Hong Kong and mainland Chinese equities “attractive from a diversification perspective”, he said.

The shift also came as concerns over China’s economic outlook eased.

The MSCI China Index traded at about 10.2 times forward earnings as of September 30, below its 10-year average of 11.7 times, while exchange-traded funds focused on China and Hong Kong recorded US$19 million of inflows in August, reversing US$1.94 billion of outflows in July.

However, some analysts cautioned against interpreting the shift in positioning as a broad return of foreign investors to Chinese equities.

“The shift is more a stop to the selling, not a broad bullish turn,” said Louis Wong, executive director at Phillip Capital Management. “What changed is investors’ buy-in to China’s attractive valuation”, along with a perception that the Chinese economy had performed better than feared.

Interest is concentrated in AI semiconductors and equipment, data-centre power and grid infrastructure, as well as selected internet platforms with visible cloud growthLouis Wong, Phillip Capital Management Foreign exposure to Chinese equities would “edge up gradually and moderately”, Wong said. With the 10-year US Treasury yield at around 5.3 per cent, investors faced a high hurdle for adding exposure to a market still associated with policy and geopolitical risks, he added.

Disappointing economic momentum, slow AI earnings growth, tighter US export controls or further weakness in the yuan could derail the shift, he added.

Wang Qi, chief investment officer at UOB Kay Hian’s wealth-management division, was more cautious, saying he had yet to see a genuine shift in global investor sentiment towards Chinese equities amid higher US interest rates.

Global investors would need to see a “sizeable and effective” stimulus by the Chinese government before significantly increasing their exposure, he said.