Investing.com-- Investors largely maintained their underweight positions on Chinese stocks in the second quarter, UBS said in a note, as a brief rally in the market did little to deter overall caution towards the country.

UBS said of the 800 active foreign institutions tracked by the brokerage, which held a total of $150 billion in Chinese stocks, about 25% of them did not hold any Chinese equities.

The funds that held positions on China largely maintained their underweight positions on the Chinese market through the quarter.

UBS data showed southbound capital flows into Hong Kong markets saw strong inflows in the second quarter, especially into defensives and high-yield sectors. But Northbound markets in the mainland saw heavy outflows in the quarter.

This trend came as Chinese stocks- as seen with the Shanghai Shenzhen CSI 300 and Shanghai Composite indexes- marked a strong rally through March, April and early-May. Hong Kong’s Hang Seng index fared even better, benefiting from its exposure to the technology sector.

But Chinese markets largely unwound this rally through June, and were now trading at near six-month lows as sentiment towards China remained dour. A string of weak economic readings factored into this notion, as did underwhelming signals on stimulus from Beijing.

Still, UBS said it expects Hong Kong markets to continue seeing inflows, with defensives and high-yield stocks likely to see increased demand amid broader market uncertainty.

“With low foreign institutional positioning and inflows from insurance funds, we see limited downside to the China equity market from here,” UBS analysts wrote in a note.

Chinese markets were nursing two years of steep declines on persistent concerns over a slowing economic recovery in the country.

State fund buying and promises of stimulus support offered fleeting relief to local markets, while signs of deteriorating growth further undermined confidence in China.

A brewing trade war with the West, after the European Union imposed steep tariffs on Chinese electric vehicle imports, also dented sentiment towards the country.

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