(Bloomberg) -- Global funds have retained a small underweight allocation on Chinese shares this year, paving the way for them to boost their holdings as the economic outlook improves, strategists say.

The number of emerging-market investors that hold an underweight position in Hong Kong and mainland Chinese shares stands at 72%, according to research by Nomura Holdings Inc. of 50 large EM funds. That compares with 78% at the end of last year, analysts led by Chetan Seth wrote in a note Monday.

“Long-only investors indeed have been trimming their underweights,” the note added. “Should stocks get further support from any improvement in the economy, investors are likely to further close such underweights and this will likely lead to greater inflows making Chinese stock rallies more self-sustaining.”

The benchmark CSI 300 Index has climbed over 5% since end-December and Chinese equities are poised to receive a fourth straight month of foreign inflows. Net purchases by overseas investors have reached 88.7 billion yuan ($12.2 billion) so far this year, according to data compiled by Bloomberg.

“A lot of investors are watching the third party plenum as well as July Politburo, which will be key for more policy visibility,” Goldman Sachs Group Inc. strategist Kinger Lau said, referring to upcoming policy meetings. “We are still trading at 10 times PE and earnings growth can be 8% this year, so if policy momentum and fundamental delivery can sustain, then there are gains to be made.” 

But some analysts say there’s reason to be cautious. A much-anticipated package of policies to rescue the beleaguered property market unveiled May 17 failed to shore up sentiment, with the CSI 300 gauge posting its first weekly decline in more than a month after the announcement. 

Funds “on aggregate have cautiously increased their holdings of mainland Chinese equities in the month of April,” Herald van der Linde, head of Asia Pacific equity strategy at HSBC Holdings Plc., wrote in a report. “However, this has fallen short of the rise in mainland China’s weight in the underlying benchmark, with funds retaining their small underweight on the market.”

--With assistance from Abhishek Vishnoi, David Ingles and Yvonne Man.

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