In September, foreign funds invested $4.6 billion in Chinese stocks, the highest monthly amount since November 2024, according to Morgan Stanley. Passive funds added $5.2 billion, while active funds saw a $0.6 billion drop, continuing the trend from August. European passive funds tracked the sizeable U.S. inflows, which began in mid-July. By September 30, total foreign passive inflows reached $18 billion, surpassing the entire year’s total of $7 billion for 2024. Active fund outflows for the year are at $12 billion, down from $24 billion in 2024.

Global Investment Trends

Global funds reduced their underweight positions in China by 1.2 percentage points. In contrast, Asia ex-Japan funds increased their overweight positions by 1.0 percentage point, while Emerging Market funds extended their underweight positions to 3.0 percentage points in China. Active fund managers boosted their investments in the Capital Goods and Semiconductors sectors compared to last month. However, they reduced their stakes in the Insurance sector and Consumer Durables & Apparels. They also lowered their underweight positions in Consumer Discretionary Distribution & Retail and Materials, while increasing underweight positions in Banks and Pharmaceuticals. Given the highest foreign inflows since last November, we should expect Chinese markets to continue rising. The strong buying from passive funds indicates a likely broad market lift, making bullish options strategies on indices like the FTSE China A50 or CSI 300 appealing. Recent economic data supports this idea, as China’s September manufacturing PMI exceeded expectations at 51.2, signaling a strengthening economy.

Strategic Sector Focus

The rise of passive index-tracking funds suggests that large-cap stocks will benefit most directly. With this influx of capital, we may see increased implied volatility, which could open doors for premium-selling strategies, like selling put spreads on key index ETFs. A similar pattern of passive-driven buying occurred in late 2020, leading to a market rally into early 2021. We should pay attention to sectors where active managers are increasing their investments, particularly Capital Goods and Semiconductors. Exploring call options or bull call spreads on ETFs in these industries could capitalize on this buying pressure. This aligns with Beijing’s push for technological self-sufficiency, which continues to receive government support. On the other hand, managers are cutting exposure to Insurance and increasing their underweight in Banks. Thus, it may be wise to exercise caution in these areas and consider put strategies. However, the decision to reduce underweight in Consumer Discretionary retail is a subtle positive sign that the worst might be over for that sector. Some consumer stocks are still trading well below their historical values, providing a potential turnaround opportunity for those willing to take on more risk. Create your live VT Markets account and start trading now.

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