Investors are loading up short bets in China stocks, while others hold on to hopes for bumper stimulus from Beijing, as rising geopolitical uncertainty and disappointing economic data drive down valuations of mainland stocks.
Chinese blue chips are down 0.2% for the year and some 34% below their record peak in early 2021. Meanwhile, Hong Kong’s Hang Seng is down 15% since January.
A global fund manager survey by BofA Securities showed shorting Chinese stocks was the second-most “crowded” trade in June, after going long on big tech.
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Foreign cash has more or less stopped coming since a surge in January. Official data showed a modest 23 billion yuan ($3 billion) in offshore investors’ net buying of mainland stocks this month so far for a year-to-date total of 190 billion yuan, most of which occurred in January.
China’s promising recovery early in the year has faltered so quickly that authorities have cut interest rates, but some feel by not nearly enough.
The yuan has sunk to seven-month lows after a smaller-than-expected interest rate cut raised doubts on whether policymakers would act forcefully enough to support the economy.
Foundering confidence has led analysts to slash economic growth predictions and global money managers still in the market say patience, caution and stimulus are the watchwords for the outlook.
Bulls bank on stimulus, bargain prices
Investors are waiting for a big burst of stimulus from China before they make more aggressive bets on a recovery.
“Ten basis points doesn’t do much,” said Dong Chen, head of Asia macroeconomic research at Pictet Wealth Management, referring to cuts in the short-term lending rate and one-year medium-term lending facility loans.
“But the point is the policy signal. With increasingly more policy measures, hopefully they can turn around this very cautious sentiment.”
Others are hopeful of a rebound due to cheap valuations.
“I can’t believe that there is anymore bad news to absorb,” Andy Maynard, head of equities at China Renaissance, said.
“The market has seemingly already discounted all negativities into the equation,” he said, suggesting opportunistic optimism – such as bargain hunting beaten-down retailers – could work well for the rest of the year.
Morgan Stanley said the MSCI China index is trading at an attractive 12-month forward price-to-earnings ratio of 9.3 – a rare 20% discount to the broader MSCI emerging markets index.
“We see outperformance of Chinese equities resuming in (the second half) as easing steps up, macro recovery broadens out and geopolitics stabilise,” said Morgan Stanley analysts.
Yet Morgan Stanley’s flow analysis shows active long-only fund managers remained net sellers in Chinese growth stocks in May and June, and short positions rose.
Stimulus can still ‘disappoint’
Hedge funds were major buyers in June, according to Morgan Stanley, but such investors with short trading horizons only underscore the fragility of the recovery.
With several months in a row of softer-than-expected consumption, production and property market data, China’s recovery is falling short of high hopes.
Wall Street banks have cut their 2023 growth forecasts, with projections now in a range from 5.1% to 5.7%, as expectations for 6% and above fall by the wayside.
Restoring confidence is looking increasingly like a long-term project and investors are positioning for a longer game and a slower rebound.
James Liu, CIO of China-focused Neo-Criterion Capital in Singapore, said he has been adjusting defensively, cutting Hong Kong stocks more exposed to US-China geopolitical tensions to invest onshore where foreign ownership is more limited.
He adopts a two-fold strategy of owning positions that stand to gain from stimulus, such as retail and real estate, while holding stocks exposed to longer-term structural trends like innovation and self-reliance.
The pockets of optimism also raise the risk of disappointment.
“I think what investors are looking for is more than just monetary policy response,” Guan Yi Low, Asia-Pacific head of fixed income at M&G Investments, said.
“We are all looking for something a bit more decisive in helping to restore animal spirits, investor confidence and market confidence, and I think that hope may be still at risk of being disappointed.”
- Reuters, with additional editing by Vishakha Saxena
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