June 16, 2024

‘Why is China down again?’ Bewildered Hong Kong-based funds ask BofA Securities to explain stock losses

Fund managers in Hong Kong appear to be baffled by the slump in Chinese stocks after the market’s worst start to a year since 2016. Some bearish investors wished they were wrong about the gloom.

“We have met many investors in Hong Kong in the past weeks, and sentiment is poor,” Winnie Wu, head of China equity strategy at Bank of America Securities (BofA Securities), said in a report on Thursday.

“Almost every day this year, people have asked ‘why is China down again?’”

The reasons are manifold, ranging from a hawkish US monetary policy, geopolitical tensions, China’s merciless anti-corruption crackdown and policy disappointment to speculation about fund liquidation.

Winnie Wu, head of China equity strategy at Bank of America Securities, pictured in December 2022, say investor sentiment is poor in Hong Kong. Photo: Edmond So

The MSCI China Index tracking more than 700 stocks listed at home and abroad has slid 9 per cent so far this month for the worst start to a year since 2016 to compound a three-year long losing streak.

The gauge has tumbled more than 60 per cent from an all-time high in February 2021, wiping out US$1.85 trillion of market cap from index members.

Some funds, wrong-footed by their bullish view on China’s post-Covid recovery a year ago, are wondering if their current bearish view on the Chinese economy is misplaced, according to the BofA Securities report.

‘Chronic disappointment’ with Chinese stocks prompts big cut in fund allocation

However, key data this week showed the economy continued to struggle through the end of last year, with consumer prices remaining in deflationary territory and gross domestic product growth trailing consensus. The central bank’s unexpected decision to hold rates has further dented sentiment, triggering sell-offs.

“What is indisputable is that China is in the middle of a structural slowdown that led to far weaker activity than most expected in 2023, and that will continue to affect the outlook as we look ahead to 2024,” analysts at Rhodium said in a note recently.

Still, some veteran China investors reckon that the nation’s economic fundamentals are not as bad as stock prices suggest, according to BofA’s Wu.

Despite concerns over top-down market performance, investors remain constructive on good Chinese stocks, Wu said. More than half of the single-stock long ideas were in China, mainly in the internet sector, she added, citing recent meetings with clients.

China stocks rout exposes risk from US$30 billion of ‘snowball’ derivatives

The risk reward is skewed to the upside as MSCI China is trading at extreme valuation and foreign investors’ positioning has dipped below an October 2022 trough, according to James Wang, head of China strategy at UBS Investment Bank.

Historically, if investors bought into the MSCI China index at this valuation multiple, they would have generated an average return of 12 per cent in one week, he said.

“Equity investors are pricing in a more pessimistic outlook on the domestic economy than investors in other markets,” Wang said.

“With trough valuation multiples, light investor position and potential support from the ‘national team’, we believe risk reward is attractive at this level.”

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