Some leading fund managers are positioning themselves for a bull run in Chinese stocks, as they bet on a lasting economic recovery to revive confidence and appetite for equities trading at their cheapest level in more than five years.
“This is a great entry point to get invested into the Chinese market,” said Hayden Briscoe, head of Asia-Pacific multi-asset portfolio management and head of asset management in Hong Kong at UBS. “China is going to have a much nicer recovery. Basically, a bull market.”
Recent data shows green shoots are emerging in China’s economy as Beijing’s policy support takes hold. Factory activity surprisingly returned to expansionary territory in November after months of contraction.
Figures due this week are expected to show exports stabilising and consumer deflation pressure easing, according to economists tracked by Bloomberg.
The MSCI China Index, which tracks more than 700 stocks listed at home and abroad, has declined 12 per cent this year, pulling valuation down to 10.55 times price-earnings, the lowest since 2018. Stocks in the index traded at an average 14.78 times multiple over the past five years, according to Bloomberg data.
“We have gone overweight already,” said Briscoe, who has been increasing the weighting of H shares to UBS’s portfolio and is looking to add exposure to A shares.
The Hang Seng Index in Hong Kong and the CSI 300 Index of China’s onshore stocks have slumped in the past four months, taking the value destruction this year to US$450 billion among their index members, according to Bloomberg data.
Investors should look past that pain and get back into the market, said Terrence Gray, a money manager and analyst at Lazard based in New York, who has been adding Chinese stocks as part of his Rising Billions strategy focused on emerging markets.
“For the past few years, we were pretty significantly underweight,” Gray said, whose firm had US$244.4 billion in assets under management as of July. “We have been adding to it. It’s one of the markets that we see as very attractive. People are starting to look at it a little more closely and that will continue to drive the market.”
JPMorgan, HSBC see long winter ahead for Chinese stocks
JPMorgan, HSBC see long winter ahead for Chinese stocks
With foreign investors pulling out so much capital, Briscoe believes the market is technically set up for a rally.
“The government has put a base under the economy, and now it’s a confidence trick,” Briscoe said. “We have confidence that the recovery is happening. It’s just taking longer, but the robustness of the growth is going to be a lot stronger and it’s going to last for longer.”
UBS is betting on state-owned enterprises, artificial intelligence and energy firms to profit from the next bull run, he added.
The UBS China Allocation Opportunity Fund, which oversees US$1.3 billion in assets, produced a negative return of 1.5 per cent this year as of July.
Lazard, meanwhile, is more optimistic on e-commerce and healthcare, seeing attractive risk rewards after the slump.
“Across the board you have incredibly cheap valuations,” Gray said. “There are certain value stocks with dividend yields. That’s not something that has happened in a few years.”