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Foreign institutions have always been called smart money by the market.

A recent research report from Caitong Securities shows that the market value of foreign-owned shares has decreased by 800 billion yuan in the past three years, mainly due to stock price adjustments, but the overall inflow is still about 130 billion yuan. Specifically, the structure of foreign-owned holdings has also changed, with electricity and new energy replacing food and beverage as the largest heavily-held industry.

The market value of foreign-owned shares has dropped by 800 billion yuan in the past three years

The latest research report from the strategy team of Caitong Securities shows that from December 31, 2021 to August 9, 2024, the market value of northbound funds' holdings decreased by about 830 billion yuan from the 2021 high of about 2.7 trillion yuan, but this was mainly attributed to the sharp decline in stock indexes since December 2021. However, in terms of capital flows, northbound funds still had a net inflow of 128.7 billion yuan in the past three years.

Wind data shows that from 2014 to 2023, northbound funds have been in a net inflow state every year, and reached a peak in 2021. A fund person pointed out to reporters that northbound funds have indeed been net inflows overall in the past three years, but it should be noted that there has been a net outflow in the past year.

The data further shows that as of August 15, northbound funds have had a slight net outflow of 40 million yuan since 2024. At the same time, northbound funds have had a net outflow of more than 60 billion yuan in the past three months, and a net outflow of more than 6 billion yuan in the past six months.

In this regard, the report pointed out that due to the temporary impact of the strengthening of the US dollar, foreign capital has outflowed more than 100 billion since July 2023. Structurally, there are more adjustments in the global asset allocation of active foreign capital, while passive funds are still relatively stable.

An investment researcher at a fund company in Shanghai pointed out that from 2018 to 2021, foreign capital was a net inflow and the amount was also increasing. However, since 2022, it has gradually weakened, which is related to the change in the type of funds flowing into A-shares in recent years.

Guosen Securities Strategy Team believes that in recent years, the role of foreign capital in the net inflow of A-shares has evolved into marginal pricing power. In terms of foreign capital pricing power, passive foreign capital has gradually replaced active foreign capital as the main force. Passive foreign capital has a longer investment period and is more sensitive to long-term returns. In the process of leaping from quantity to quality, the domestic economy has experienced a long-term downward trend in interest rates and a fluctuation decline in the ROE center. This has a greater impact on active investment foreign capital, but has a weaker driving force on passive foreign capital.

Electric power becomes the top industry for foreign investment

At the same time, the report shows that foreign capital has been mainly invested in new energy and TMT in the past three years, and the inflow direction has a high degree of overlap with the fund's heavy holdings, with about 40% flowing into the top 100 stocks heavily held by active equity funds. From the perspective of overweighting, the main positions in the past three years have been increased in new energy chains and TMT.

Specifically, at the end of 2021, food and beverage, power equipment and new energy, and medicine were the top three industries for foreign investment, accounting for 13%, 12%, and 9% respectively. As of August 9, 2024, the top three industries for foreign investment have become power equipment and new energy, food and beverage, and banks, with allocation ratios of 12%, 11%, and 9%. From the perspective of foreign investment holdings, power equipment has replaced food and beverage as the largest heavily invested industry, and the proportions of banks and electronics have increased by 3 percentage points and 1 percentage point respectively.

Judging from the industry characteristics of holdings and allocations, foreign capital's current absolute positions are still concentrated in consumer stocks. Consumer-oriented industries such as home appliances, leisure services, and food and beverages are still the sectors with the highest absolute proportion of foreign capital holdings; but from the trend point of view, foreign capital's allocation to China's manufacturing industry has increased rapidly. This year, more than half of the net purchases of northbound funds have flowed into midstream manufacturing. In the electrical equipment sector, CATL jumped from the ninth largest foreign-invested stock at the end of 2020 to the second largest foreign-invested stock in 2021.

In fact, foreign capital, which is known as "smart money", also has a deep impression of its investment preferences in the A-share market. For example, it prefers companies with stable growth potential, industry leading position and good profitability, especially those in the consumer and financial industries.

However, in the past year, foreign investment has increased in semiconductors in AI, electricity and banks in computing power + dividends. The report shows that in terms of overweight ratio, electronics, electricity and utilities, and banks have increased in foreign investment in recent years. From the perspective of sub-sectors, AI-related semiconductors, communication equipment, computer equipment, dividend-related power generation and power grids, regional banks, etc. have increased their overweight ratios. From the perspective of the top 30 newly-added northbound stocks, most of them are AI+ (Zhongji Xuchuan, Will Semiconductor, etc.) + dividends (Industrial and Commercial Bank of China, Agricultural Bank of China, PetroChina, etc.).

Previously, the strategy team of Guosen Securities found that the industry preference of foreign capital for A-shares has undergone a transformation from large consumption, pharmaceuticals and biology to industrial upgrading as industrial policies and themes evolve. From 2016 to 2018, my country's economy developed rapidly, domestic demand growth drove the consumer goods market, and foreign capital flowed into the consumer sector; from 2018 to 2020, trade frictions dragged down exports among the three major drivers, and financial factors assumed the function of countercyclical regulation. Subsequently, under the disturbance of the new crown attacking the world and the influence of the national large fund projects, the technology and pharmaceuticals and biology sectors came from behind; from 2020 to 2022, under the guidance of industrial progress and greening and digitalization, foreign capital began to deploy industrial upgrading sectors; from 2023 to date, with the economic recovery and global technological resonance, as well as the strong reform of the domestic financial system, foreign capital has begun to rotate its layout in the cyclical, growth, and financial sectors.

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