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China stock Bears turn Bulls: Short-term bounce on bargain valuations

January 17, 2024
in Business
China stock Bears turn Bulls: Short-term bounce on bargain valuations
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Amidst the prolonged slump in Chinese stocks, even some long-standing skeptics are considering the possibility of a short-term rebound. Investors like Bell Asset Management and Abrdn Plc are reevaluating their positions, citing the current attractive valuations in the market. JPMorgan Asset Management and BlackRock Inc. also acknowledge the potential for a bounce, emphasising the historically low valuations following a 60% decline in the MSCI China Index from its 2021 peak. While concerns over China’s slowing economy persist, signs of a possible market rally, especially with catalysts like the late 2022 Covid reopening, are prompting a tactical shift in investor sentiment. However, caution remains as geopolitical tensions and deflationary pressures continue to cast uncertainty over China’s market resurgence. Options trading is on the rise, indicating a hedging strategy against potential market upswings.

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By Richard Henderson and Michael Msika

The China stock rout has run so deep and long that even some of the skeptics are preparing for at least a short-term bounce. 

Bell Asset Management Ltd., a long-time bear, is now scouring the market as stocks are “just so cheap,” while Abrdn Plc is looking to gain exposure via options. JPMorgan Asset Management and BlackRock Inc. see potential for a rebound as valuations have become attractive. 

Their views underscore a tactical shift in global investors’ sentiment toward China. While the country’s slowing economy and policy uncertainties have prompted long-term global funds to retreat en masse, at least some investors see potential for a technical rebound at such cheap valuations.

Investors are aware that when the right catalysts kick in — such as the late 2022 Covid reopening — the market can rally hard. Signs are emerging that options traders are gearing up for that possibility. Call options on a large US-listed Chinese stock ETF surged last week even as key equity benchmarks stumbled. The MSCI China Index has lost nearly 5% in 2024 after a third straight annual loss.  

Ned Bell, chief investment officer for Bell Asset Management who has avoided Chinese stocks for nearly a decade, is considering buying large tech stocks including Tencent Holdings Ltd. as regulatory woes ease. 

“We are less bearish and we are finding value selectively,” said Bell, whose Melbourne-based firm manages A$5.1 billion ($3.4 billion) in global equities. The last time he owned a mainland stock was in December 2014. 

Bell’s cautious approach shows how Chinese stocks have turned into a sort of global pariah in recent years as money managers doubt their investment worthiness. The market missed out on last year’s worldwide rally as tensions with the US ratcheted up and Beijing showed only lukewarm response to boosting the economy.

Read more: Loadshedding worse than stated, actually hit ‘Stage 8’ admits Mantashe

Yet the selloff has pushed valuations to near historical lows. The MSCI China Index, down roughly 60% from its 2021 peak, trades at less than nine times its forward earnings estimates. That compares with a reading of 22 for MSCI India and 19 for the S&P 500.  

Read: Wall Street’s China Bulls Seek Redemption After a Humbling Year

JPMorgan Asset Management, which has a neutral view on the country’s equities, anticipates a rebound once the earnings cycle turns around.

“Valuation is certainly very attractive and positioning seems to be pretty light,” said Sylvia Sheng, global multi-asset strategist at the money manager. “We have seen stabilization in the macro momentum, but we think gradually that will lead to stabilization in the earnings reduction trend.”  

China’s economy appears to have bottomed out, but the recovery ahead is set to be slow and bumpy. Data due Wednesday will likely show the economy expanded 5.2% for the entirety of last year, hitting its growth goal. There’s been more mixed news recently, with consumer prices falling again but exports showing signs of stabilization.  

For many, though, building direct exposure remains a risky bet. Chinese stocks have started the year poorly, ranking among the worst for major global indexes. 

With geopolitical tensions complicating Beijing’s tech ambition and deflationary pressures growing, the market is unlikely to gain its former clout anytime soon. Some investors are turning to options to hedge for a potential upswing, given how hopes for a revival last year were dashed again and again. 

“We were neutral for the last three quarters but we are now starting to see value,” said Louis Luo, head of multi-asset investment solutions for Greater China at Abrdn. “We are thinking about buying some upside protection” in case the stock market surges and weigh on relative performance for emerging market funds, he said. 

Total option traded volume on the iShares China Large-Cap ETF soared to nearly 500,000 contracts last Wednesday, the second spike to such levels in less than a month. The number of calls traded that day was more than double the amount for put contracts.

The Hang Seng China Enterprises Index, a gauge of Chinese stocks trading in Hong Kong, has more outstanding calls than put options.   

Read more: Corion’s Bacher decodes 2023 – why the predicted “terrible” year for investors wasn’t

Thomas Taw at BlackRock agrees valuations look attractive, but notes China is a “very difficult market.”

“We are getting to a level where it’s worth having some China exposure tactically in your portfolio and investors still need to be invested in China — but it can be difficult to pick the time when we see some pick up,” said Taw, head of APAC iShares investment strategy at BlackRock Asset Management North Asia. “Most investors are looking at this as a trading market, rather than a secular, long-term market.”  

For those who have held on to their China bets throughout the rout, now may be the time to go bolder.  

Invesco Ltd. is rotating toward companies it believes will offer earnings growth, and away from stable, dividend-paying companies that it has held in the past few years.

“In China, we want to go for growth,” said William Yuen, investment director for Invesco in Hong Kong, which is overweight Chinese stocks in its Asia-ex Japan strategies. The asset manager is keen on tech companies after a period of regulatory uncertainty as “companies are in a much clearer operating environment where they understand what they can do,” he said. 

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© 2024 Bloomberg L.P.

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