Insights 
VT 
In September, foreign funds invested US$4.6 billion in Chinese equities, the highest monthly level since November 2024, as per Morgan Stanley. Passive funds contributed with US$5.2 billion in inflows, while active funds saw a decrease of US$0.6 billion, maintaining the trend from August.
European passive funds matched the substantial U.S. inflows, which began in mid-July. As of September 30, year-to-date foreign passive inflows totalled US$18 billion, surpassing the entire 2024 figure of US$7 billion. Active fund outflows stand at US$12 billion for the year, down from US$24 billion in 2024.
Global Investment Trends
Global funds decreased their underweight positions in China to 1.2 percentage points. Meanwhile, Asia ex-Japan funds raised their overweight positions by 1.0 percentage point, yet Emerging Market funds extended their underweight positions to 3.0 percentage points against China.
Active fund managers increased their stakes in the Capital Goods and Semiconductors sectors compared to the previous month. At the same time, they decreased their exposure to Insurance and Consumer Durables & Apparels sectors. Reductions were also made in underweight positions in Consumer Discretionary Distribution & Retail and Materials, while they increased underweight positions in Banks and Pharmaceuticals.
With the highest foreign inflows since last November, we should position for continued upward momentum in Chinese markets. This strong buying, especially from passive funds, suggests a broad market lift, making bullish option strategies on indices like the FTSE China A50 or CSI 300 attractive. Recent economic data supports this, as China’s September manufacturing PMI beat expectations at 51.2, indicating a strengthening economy.
Strategic Sector Focus
The dominance of passive index-tracking funds means large-cap stocks are likely to see the most direct benefit. Given this influx of capital, we might see a rise in implied volatility, which could create opportunities for premium-selling strategies like selling put spreads on key index ETFs. We saw a similar period of passive-led buying in late 2020, which preceded a strong market rally into early 2021.
We should focus on the sectors where active managers are adding weight, specifically Capital Goods and Semiconductors. Exploring call options or bull call spreads on ETFs tracking these industries could capture this targeted buying pressure. This move aligns with Beijing’s policy push for technological self-sufficiency, which continues to receive state support.
Conversely, managers are reducing exposure to Insurance and increasing their underweight in Banks, suggesting we should remain cautious there and could consider put strategies. However, the decision to reduce the underweight in Consumer Discretionary retail is a subtle positive signal that the worst may be over for that sector. Some of these consumer names still trade at a significant discount to their historical valuations, presenting a potential turnaround play for those with a higher risk appetite.
