(Bloomberg) -- Global money managers may be starting to unwind their hugely popular long Japan, short Hong Kong equity trades due to the widening gap between valuations in the two markets, Goldman Sachs Group Inc. says.

A number of macro hedge funds have started selling Japanese shares and covering their existing short positions in Hong Kong, Goldman equity sales staff wrote in a trading note published Friday that was seen by Bloomberg. Some long-only funds may also be rotating toward Hong Kong as valuations look expensive in Japan and the US, they said.

Japanese shares have retreated in recent weeks after a world-beating rally in the first quarter. The Nikkei 225 Stock Average narrowly avoided entering a technical correction after being up as much as 22% for this year when it reached its record high in March. 

The Hang Seng Index meanwhile is the best-performing major global equity gauge this month, climbing more than 7%. The rebound has been driven by a combination of government policy support, inflows from the mainland, and the allure to overseas investors of a local currency pegged to the strengthening greenback. 

A Goldman spokesperson didn’t immediately respond to Bloomberg’s request for comments.

Crowded Trades

Chinese equities listed in Hong Kong have “surged as funds continued to unwind or rebalance from their crowded trades, like AI, Japan and the US, to Chinese markets as US rates might stay high for longer,” Bank of America Securities strategists led by Willie Chan wrote in a research note published Monday.

Hong Kong stocks are a lot cheaper than the Japanese peers, at least on some metrics. The Hang Seng Index is trading at 8.5 times forward earnings estimates, compared with more than 21 times for the Nikkei 225.

Read more: China Loses Out as Global Funds Chase Returns in Japan Stocks

Part of the reason for the switch away from Japan may also be the weakening yen, said Guo Chen, an analyst at CSC Financial Co.

“The yen has depreciated more than expected, eroding the returns from investing in the Japanese market,” he said. “The current allocation focus of foreign capital in Asian markets has shifted from Japan to Hong Kong stocks, becoming the main driving force for the recent gains in Hong Kong shares.”

Still, some analysts say this may not be the end of the long-Japan-short-Hong-Kong trade, just a brief interruption.

The current dynamics are “not fundamentally driven and usually short-lived,” said Gilbert Wong, a strategist at Morgan Stanley in Hong Kong. “This trade will be done in a week’s time.”

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