Goldman Sachs has reported that in the lead-up to the U.S. presidential election, global hedge funds, often referred to as “smart money,” have begun to offload Chinese stocks as well as a broader range of emerging market equities, while significantly increasing their purchases of U.S. stocks.
The investment bank’s brokerage team noted that a series of stimulus measures had propelled Chinese markets to soar by 20% last month, but this month has seen a substantial outflow of capital.
Following a period of robust market growth in late September and early October stimulated by Chinese government interventions, Goldman Sachs recorded the highest weekly net buying of Chinese stocks by their hedge fund clients since tracking began. However, in their latest report, the firm’s primary brokerage team indicated that hedge funds have reduced their positions in the Chinese stock market by nearly 80% as of October 23. This sell-off in Chinese stocks has led to what could be one of the largest net outflows from emerging markets ever recorded this month.
The report highlighted a decline in Chinese equities from their peak as investors expressed disappointment over the lack of detail in Beijing’s stimulus commitments, coupled with increasing risks associated with tariffs amid the potential re-election of Donald Trump.
Additionally, Goldman noted that hedge funds have similarly divested from other emerging markets, including India, Taiwan, South Korea, and Latin America.
The MSCI China Index had a stellar performance in September, jumping 23%—the best monthly gain in 22 months—yet it has dropped 4% thus far in October. The MSCI Emerging Markets Index has also seen a decline of 3% this month, following a 6.5% increase in September.
Goldman indicates that due to strong employment data and corporate profits mitigating recession concerns, this marks the first time in six months that hedge funds have turned their attention to U.S. equities. The firm’s institutional brokerage division reported that portfolio managers have consistently net bought shares in the U.S. technology sector over the past few weeks.
In light of the heightened volatility surrounding the U.S. presidential race, hedge funds have also reduced their leverage overall in the past week and throughout October.
