Chinese stocks get cheaper for money managers who don’t want to be late for economy reopening party

Hang Seng Index, dominated by Chinese entities, traded below 10 times price-earnings multiple at end-July, one of the cheapest among major global indices
‘If you wait for [signs before turning more positive], it will actually be too late because markets are pre-emptive,’ Robeco’s Crabb says

Hong Kong stock market

Cheryl Heng

Published: 3:35pm, 2 Aug 2022

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Chinese stocks, which dominate trading in Hong Kong, are cheap enough for investors to replenish their portfolios, some fund managers argue, compensating for the uncertainty over the full reopening of the economies.

July’s 7.8 per cent slide in the Hang Seng Index, the most in a year, sent the market into a technical correction and shrank the price-multiple to 9.7 times current earnings, from as high as 11.7 times in January, according to Refinitiv data.

The last time the market was cheaper on June 16, the Hang Seng Index climbed 5 per cent over the next two weeks. The earnings multiple also fell to 9.3 times on May 12, from which the index rallied 12 per cent the following month.

“Valuations have come down a long way,” Joshua Crabb, head of Asia-Pacific equities at Rotterdam-based asset manager Robeco, said during a webinar on July 27. “If you wait for [signs before turning more positive], it will actually be too late because markets are pre-emptive.”

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China’s economic reopening is just a matter of time and investors may be late to the party by looking for more positive signals. While Beijing is unlikely to abandon its stringent zero-Covid policy, the initial shock about mass screening and city lockdowns may have worn out while policymakers look to restore confidence ahead of the Communist Party’s Congress later this year.

“The government has made it clear that the focus is shifting towards greater stability and more market-friendly policies in the run-up to [the Congress],” said Raj Shant, a portfolio specialist at New York-based Jennison Associates, which manages about US$171 billion of assets. It has been building positions in the Chinese market since the start of the year, he added.

That should form “a constructive, and even a supportive” backdrop for the equity market, said Shant, who favours sectors related to electric-vehicle industry for its secular growth.

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Others are less bullish on the outlook, especially with China’s stop-start nature of the economy. An unexpected slump in manufacturing last month, and potential armed skirmish over Taiwan, underscore the risk of chasing the market on fears of missing out.

“We are underweight China because of the incremental concerns we have still on the macro side and zero-Covid policy is still in play,” Ramiz Chelat, portfolio manager at Zurich-based Vontobel Asset Management said in an interview. “Those are two key things that keep us on the cautious side.”

Besides, the weak property market has continued to depress sentiment, and bets on a cyclical rebound have not been coming through, said Chelat, whose US$6.6 billion emerging market equity strategy trimmed its weighting 10 months ago.

Chinese equities are still seen as countercyclical play, with the People’s Bank of China taking an easing path in contrast to monetary tightening in major economies in the US and Europe.

“Chinese assets are likely to demonstrate an uncommon ‘delink’ behaviour versus other major markets that synchronise under the same [tightening] forces,” said Wang Lei, portfolio manager at Thornburg Investment, which manages US$42 billion in assets. “China is likely to re-emerge as a great opportunity for investors. You will see all kinds of stimulus trying to jump-start the economy” ahead of the twice-a-decade Congress later this year, he added.