Several factors combined on Wednesday to spur a rebound in China’s troubled stock markets – the promise of rate cuts from the central bank chief, a request by regulators for funds to curb short selling of stock futures, and rumours of a large pool of state funds to bolster local markets.
The Hang Seng Index, which has fallen by 10% already this year, shot up by 3.56%, while the Shanghai Composite, which has slipped by 7%, also recovered by 1.8%.
Global investors also saw an opportunity to snap up some already cheap stocks. Measures such shrinking short positions, fund flows, options pricing and bounces on the main boards show investors have been selectively buying or at least curtailing bearish bets lately.
While a lot of long-term money has left, the selling that has driven the MSCI China index 60% lower in three years has opened a lopsided entry point if the mood shifts.
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Chinese stocks lost $6 trillion in value over the three years since February 2021, according to CNN. But, as noted, authorities have been promising increasingly strong measures to help.
Herald van der Linde, head of equity strategy for Asia Pacific at HSBC, forecasts 30-40% gains for Chinese equities when the gloomy sentiment lifts. The Hang Seng had its best day in two months on Tuesday and has bounced 5% from Monday’s 15-month low.
Foreigners were net buyers of 4.8 billion yuan ($677 million) in Chinese equities on Monday and Tuesday this week.
“While people are not necessarily very bullish on Hong Kong and China… they don’t want to miss out those very concentrated 5% to 10% moves on the upside,” Jason Lui, head of APAC equity derivatives strategy at BNP Paribas, said.
Andrew Lapping, chief investment officer at Ranmore Fund Management, said: “We see the sharp decline in the Chinese market as an opportunity… Over the past year, the S&P 500 is up over 20% while the Hang Seng is down 30%. There is no way the underlying business values have diverged to this degree.
“This underperformance, particularly over the past month, has given us the opportunity to buy high quality, well-capitalised businesses at very low prices.”
Recent meltdown capped three years of losses
Three years of losses have also left China the cheapest market in the world. By one popular metric, the forward price-to-earnings ratio – which is roughly eight in Hong Kong and 10 for China – the markets are half as expensive as those in the US and Japan.
Short interest on US-listed Chinese stocks and Hong Kong stocks has dropped sharply, down 15% over the 30 days to January 22, according to data from analytics firm S3 partners.
E-commerce giants Alibaba Group, PDD Holdings, and electric car maker NIO Inc, saw the largest declines.
“We see continued short covering… which may be signalling at least a short-term bottom to the Chinese markets,” Ihor Dusaniwsky, managing director of predictive analytics at S3, said.
The trend is echoed in derivatives, where put implied volatility, or the cost of Hang Seng China Enterprises Index put options, which would profit if the index falls, has slid in the past few months to hover around multi-year lows, BNP Paribas estimates.
‘Selective opportunities’ amid multi-year lows
The tactical opportunity is also luring back big investors who had sold, while driving a change in some managers’ strategy away from betting big on China’s widespread macroeconomic growth to picking out particular stocks or trends.
“China is no longer a giant allocation story, as it was in the past, but there are selective opportunities at stock level,” Monica Defend, head of the Amundi Investment Institute, said.
Negative sentiment at levels unseen in the careers of many investors is also, for some, a drawcard. Morgan Stanley estimates 70 of 80 global emerging market funds they track are either equal or underweight China.
This month’s Bank of America survey of Asia fund managers showed only 14% of respondents fully exposed or increasing exposure in China – with the rest holding back.
Market performance has been poor. The Shanghai Composite and CSI300 indexes hit multi-year lows on Monday and skepticism on government rescue plans is sky high.
Many investors have lost big trying to pick a bottom, with Singapore-based Asia Genesis Asset Management suddenly closing its fund this week after big losses on its bullish China bets.
Still, such an environment often breeds a shift in sentiment and risk appetite.
London-based M&G Investments, which reduced most of its China exposure in early 2023 under its Episode Macro strategy, pivoted to long China at the end of 2023 and now sees China and Hong Kong equities as its top conviction calls in Asia for 2024.
“We’ve been buying in Hang Seng and HSCEI futures,” said Michael Dyer, M&G’s multi asset investment director. Valuation and sentiment make the trade almost “the classic margin of safety purchases,” he said.
Manulife Investment Management favours China equities in 2024 from a risk-reward perspective. LGT, a Liechtenstein private bank and asset manager, holds a neutral view on Chinese equities but warns it’s risky to bet against the market at current valuations.
“The technical rebound can impact you as an investor if you do that,” said Stefan Hofer, chief investment strategist at LGT Bank Asia.
- Reuters with additional inputs and editing by Jim Pollard
NOTE: Additional comment was added to this report on January 24, 2024.
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