Global stock markets welcome the "most bullish morning of the year," with Goldman Sachs' fund flow expert exclaiming that this "China trade" is different from the past

Micron Financial Report Guide brings good news of strong AI demand, while the Central Political Bureau Meeting conveys signals of significant fiscal and monetary support, and Saudi Arabia is reported to undergo a major shift towards "increasing production to maintain market share," which is putting pressure on oil prices. Global stock markets welcomed multiple positive news on Thursday, with Goldman Sachs expert Scott Rubner, who studies fund flows, pointing out that many investors have described Thursday as the "most bullish morning of the year."

In a report released on Thursday, Rubner, Managing Director of the Global Markets Division at Goldman Sachs, stated that although the risk exposure remains high, the news in the past two days may not necessarily be a catalyst for further historical highs in the S&P 500 index, but it is different for the Chinese stock market. Why does he think so? Rubner listed some reasons:

• Previously, global stock market investors were generally reducing their holdings of Chinese stocks, but the Shanghai Composite Index has risen by about 10% in the past three days, marking the largest three-day gain since 2020.
• Given the short positions, low positions, and index tracking issues of global funds at the end of the quarter, the rise in Chinese assets in a single week before was a painful trade for investors.
• The resurging market quickly became the most favored trade after the U.S. presidential election in November and December.
• In the past 48 hours, Rubner has had more Zoom conference calls related to China than all related calls throughout the year.
• How did the market consensus view it before? Contrarian trading. How is the current consensus? This time may not be contrarian trading.
• So far, Goldman Sachs has not seen any international buyers outside of China.
• Goldman Sachs is starting to see a FOMO mentality emerging in China, with a fear of missing out on the rise, "everything else is at historically high levels."

On Thursday morning, Rubner is focusing on four things:

First, the policy responses from the Chinese central bank and the Securities Regulatory Commission this week, which have eliminated the left tail risk. Second, October 1st is the 75th anniversary of the founding of New China. Third, the Golden Week holiday for National Day, during which A-shares are closed. Fourth, the crucial Political Bureau meeting in September, which has never coincided with the end of the month before.

Furthermore, the current position is very favorable for Chinese stocks. Rubner listed the following signs as evidence:

• Record demand for Chinese stocks. On Tuesday, September 24, the Prime Brokerage (PB) accounts of Goldman Sachs collectively saw the largest net buying volume of Chinese stocks since March 2021, and the second largest net buying volume in the past decade, driven almost entirely by long positions
• From the perspective of fund flows, on Wednesday, September 25th, Goldman Sachs observed a continued demand for Chinese stocks, i.e., bullish buying.
• Chinese stocks have been bought in Goldman Sachs' PB business (macro managers, quant and multi managers, i.e., short-term traders) for eight consecutive days, rather than traditional long/short or long-only (LO) positions. Stocks may be forced to rise.
• As of the end of August, Chinese stocks accounted for 5.1% of global mutual fund assets, a level lower than 99% over the past decade.
• As of the end of August, on an asset-weighted basis, actively managed mutual funds were underweight Chinese stocks by 310 basis points compared to the benchmark.
• In Goldman Sachs' PB accounts, the total and net allocations to China remain very low, currently below 93% and 86% over the past five years, respectively.
• Prior to the recent rebound, hedge funds had less than 7% exposure to Chinese stocks, the lowest level in five years.

Finally, Rubner mentioned the "most important point" in the report,

In terms of market structure, assets in China and emerging markets have not benefited from passive fund inflows on a daily basis as in the U.S. market.

The report mentioned that assets in emerging markets do not benefit from passive allocations. Of the $695 billion in inflows into U.S.-listed ETFs this year, only $49.3 billion flowed into emerging market ETFs, i.e., 0.71% of passive assets flowed into emerging markets. However, the situation is changing since the debut of the Deutsche Bank Harvest CSI 300 Index ETF (ASHR) on June 9, 2022