Global long-term investors are showing signs of pausing their shift away from Chinese equities, according to Morgan Stanley. The pace of outflows from Chinese equities slowed towards the end of February, with regional active managers starting to add growth and tech stocks. This development coincides with China's efforts to bolster confidence in its economy, with mainland stocks ending a six-month streak of foreign outflows. The analysis suggests that the shift in flows might not solely be due to Beijing's intervention via the "national team," potentially alleviating concerns about the sustainability of the rebound from January lows.

According to strategists, the realized volatility of MSCI China surged from 20% in late December to over 30% in mid-February on an annualized basis, making a deep underweight on China a risky position for many regional funds. They highlighted that Asia ex-Japan funds and emerging markets funds based in the US and Europe reduced their underweight stance on China in February. Equities in mainland China and Hong Kong witnessed $2.2 billion of outflows on a net basis last month, with most of it attributed to investors' redemptions, compared to $2.6 billion in January, citing EPFR data. The moderation in outflows signals a potential reevaluation of asset allocations across the region by money managers. Some funds have begun trimming holdings in rival India due to excessive valuations, which could pave the way for China to regain its prominence in global portfolios.