(Bloomberg) -- China’s equities are poised to claim back a one-third weighting in a benchmark emerging-markets index, following a sharp outperformance sparked by an easing of strict Covid curbs and a pivot to pro-growth policies.

Stocks listed in the mainland and Hong Kong now account for 32.2% of the MSCI Emerging Markets Index, up from 26.8% in October. The MSCI China Index has jumped 46% since then compared with a 16% gain in the EM gauge.

President Xi Jinping has moved to resolve almost everything that’s weighed on China’s outlook. He dismantled Covid-19 restrictions, implemented a slew of measures to support the property sector, and made progress toward resolving an audit spat with the US and eased a crackdown on private enterprises.

China’s outperformance underscores the nation’s increasing appeal as a diversifier in global portfolios as recession fears mount in developed markets. Its economy is forecast to expand by 4.5% this year compared with little growth in the US and a potential contraction in the Eurozone, according to data compiled by Bloomberg.

China’s recovery is taking shape “at the same time that global investors are fretting about the outlook for the developed markets,” said Gary Dugan, chief executive officer of the Global CIO Office. “Its own positive dynamics that are not reliant on a vibrant global economy offer diversification against developed-market risk.”

China’s rising sway will also test the resolve of investors who chose to ditch the EM anchor last year for other markets including India amid relentless selling. The MSCI China Index slumped to an 11-year low in October in the wake of Xi’s decision to place loyalists in key positions.

China’s $5 Trillion Rout Creates Historic Gap With Indian Stocks

A low bar for relative economic outperformance for China coupled with its lower-than-average valuations also raise the odds of Asian and emerging equities beating global peers in 2023. The MSCI Asia Pacific Index is about 2% away from entering a bull market. 

Dugan added that the perception of China among global portfolio managers appears to have come full-circle — it went from being “a stock market darling, to uninvestable, and back to at least attractive,” he said.

According to Morgan Stanley strategists, Chinese stocks will receive more allocation and outperform global peers this year. They claim that investor sentiment has improved as a result of the faster-than-expected reopening and clearer signals from policy makers that the economy is a priority.

“Signs of earlier macro bottoming out post Covid, committed stimulus policy, further currency strengthening, as well as near-term stabilization of geopolitical uncertainty should warrant greater allocation into China,” strategists including Laura Wang and Jonathan Garner wrote in a note on Thursday.

The US bank’s team had correctly predicted deepening routs in emerging and China markets last year before turning overweight on China in early December.

(Updates to add Morgan Stanley’s comments in final three paragraphs.)

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