U.S. Investors Are Turning Bullish on China, Korea Stocks

(Bloomberg) -- U.S. investors are turning more bullish on markets such as China and South Korea that appear likely to recover sooner than peers amid the global coronavirus outbreak.

Short interest in the U.S.-listed iShares MSCI exchange-traded funds for both countries has tumbled in recent weeks alongside slowing infection rates and improving sentiment. In contrast, short interest has ticked higher in equivalent funds for Japan and Australia.

For the South Korea ETF, short interest peaked at just under 15% of shares outstanding in mid-March but has since dropped to about 1%, according to IHS Markit data. China short positions topped out at almost 24% in February and have since more than halved. The fund for Japan, which has seen cases continue to climb and recently postponed the Tokyo Olympics, has seen a steady increase in short positions.

“The countries that put on more aggressive containment measures initially out of the gate, following the Chinese blueprint, are going to see the virus pass quicker,” Stephen Innes, chief global market strategist with AxiCorp Ltd. said in a phone interview. “Those positions are going to come in. It would be even more if the currencies were helping.”

If the yuan and Korean won begin to rally -- after tumbling amid the crisis -- investors will look to increase exposure to other assets such as bonds and equities, Innes said. He has been buying into both Chinese and Korean stocks and currencies in recent weeks, he added.

First-In, First-Out

Morgan Stanley strategists including Daniel Blake are also turning more bullish on China and other emerging markets in the region. The firm raised its overweight position in China to 250 basis points on factors including demand for new-economy stocks, inflows to Hong Kong dual-listed shares and a whole-nation approach to the virus “which appears to be bringing in a first-in, first-out result.”

The strategists also upgraded shares in Hong Kong and Malaysia to equalweight, while maintaining small overweights in India and Singapore.

Equity benchmarks in South Korea and China are already showing signs of a turnaround. The Kospi index has rallied 18% from its March 19 low, compared with an 8% gain in the MSCI Asia Pacific Index. The Shanghai Shenzhen CSI 300 Index is up 5.5% from its March 23 low.

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