Fund managers hesitant about China stocks even with 75% discount

LONDON (BLOOMBERG) - Fund managers are leery of buying Chinese stocks as the country's close ties to Russia, extreme Covid-19 curbs and lack of clarity on the end of regulatory crackdowns overwhelm the dip buying opportunity presented by the 75 per cent plunge from their peak.

Most of the investors interviewed by Bloomberg are hesitant to dive into the weakness even as valuations slump to the lowest levels in more than a decade. Some are planning to hold on to their existing positions, but few are looking to add.

"We are still avoiding Chinese stocks," said Mr John Plassard, a director at Mirabaud & Cie. "There are too many question marks."

Mirabaud sold its Chinese equity positions last year and has not returned to them, he added.

The Nasdaq Golden Dragon Index, home to the likes of Alibaba Group Holding, Baidu and NetEase, slumped 11.7 per cent on Monday (March 14) and has plunged a whopping 29 per cent over the last three sessions to the lowest since July 2013.  Chinese stocks listed in Hong Kong also sold off on Monday, posting their worst day since the 2008 global financial crisis.

The slump came after US officials said that Russia had asked China for military assistance in its war against Ukraine. China denied the report, but traders worry that any sanctions against Beijing could worsen supply chain constraints and hit global growth.

It is the concerns about Russian sanctions spilling over to China that is putting pressure on Chinese equities, according to Ms Jian Shi Cortesi, who manages China and Asia equity funds at GAM Investments. The turning point will only come when selling in the American depository receipts is "exhausted" and the Ukraine situation is resolved, she said.

Meanwhile, JPMorgan Chase analysts on Monday downgraded 28 China stocks listed in the United States and Hong Kong, citing regime shift as investors price in geopolitical risks and incremental concerns about regulatory risk.

In addition, sentiment has also been hurt by a Covid-19-induced lockdown in Shenzhen, a key tech hub just outside Hong Kong, and the northern province of Jilin.

The Nasdaq Golden Dragon rarely trades at a discount to the S&P 500 Index. At 14 times forward earnings, the gauge of Chinese stocks is now at the steepest discount to the S&P 500 since 2008. In Hong Kong, a gauge of Chinese tech stocks saw its valuation plunge to 18 times from 40 in June 2021.

For Trium Capital portfolio manager Peter Kisler, that makes this a good time to raise exposure to Chinese tech companies.

"We are adding to our position today as it seems we are seeing liquidation go through," Mr Kisler said. "I think the drop in Russian shares to zero has scared a lot of investors, who now see a non-trivial risk of the same happening in China."

Mr Xiadong Bao, an emerging-markets fund manager at Edmond de Rothschild Asset Management, is slowly adding positions, but said "it seems too early to turn positive given the multiple subjects we have here".

Meanwhile, most fund managers are sitting on their hands - at least for now.

Bocom International wrote in a note that "it would still be rash to catch the falling knives" in Hong Kong, even as the city's equity market is showing some signs of capitulation.