The bearish tide against Chinese equities is growing but for some money managers, the stocks are value for money.
JPMorgan Asset Management is adding more Chinese shares to its portfolio on bets that the market’s inexpensive valuation and the government’s support for the economy will bolster returns. Invesco Asset Management Ltd. is overweight the stocks, and favors top tech names such as Alibaba Group Holding Ltd. and Tencent Holdings Ltd.
The optimism shows some market veterans are wagering on a revival even as Wall Street banks from Morgan Stanley to Goldman Sachs Group Inc. cut their forecasts for key Chinese equity indexes. Hopes are mounting that policy makers will deliver more stimulus to shore up growth, after authorities asked the nation’s biggest banks to lower deposit rates.
Looking at “where the valuations are today, it is probably good to go a bit overweight,” Ayaz Ebrahim, JPMorgan’s emerging market and Asia Pacific equities portfolio manager, said in a Bloomberg TV interview. “From a more neutral position we have been adding again.”
Geopolitical risks and an underwhelming economic recovery have turned Chinese equity gauges into global underperformers, with the MSCI China and the Hang Seng China Enterprises indexes both falling into bear markets in recent weeks.
While pessimism remains dominant, some are sensing a bottom. Authorities were said to have asked the nation’s biggest banks to lower their deposit rates for at least the second time in less than a year, marking an escalated effort to boost the world’s second-largest economy. The government is also mulling a new property support package, according to an earlier report.
Ebrahim stressed that the market is inexpensive, given the government has taken steps to improve business and consumer confidence. On earnings-based valuations, the HSCEI index is trading below its five-year average, and is at a 6% discount to its one-year forward projected book value, according to data compiled by Bloomberg.
While there has been some delay in the economic recovery, the market is “looking at 18%-19% earnings this year and about 15%-16% next year and is cheap,” Ebrahim said. “It is basically trading low, near book, and earnings are still coming through.”
For Invesco, Chinese firms offer “pretty good value and earnings in some areas,” with companies such as Alibaba and Tencent focused on delivering shareholder returns, said Tony Roberts, who manages the Invesco Pacific Fund (UK).
‘Too Cheap’
The Invesco fund has been overweight Chinese equities since January 2022, with the stance reflecting its position in both China and Hong Kong shares, according to Roberts. The vehicle increased its holdings in Alibaba this year as the shares weakened, and the stock accounts for around 2.3% of its total holdings, he said.
“You have just a general discount because US-China tensions are very high at the moment, so I think that also gives us an opportunity in China,” Roberts said in an interview. China’s big tech companies such as Alibaba and Tencent are “just too cheap.”
The Invesco fund has returned 8.9% over the past three years to beat 93% of its peers, according to data compiled by Bloomberg. It had £240.7 million ($299 million) of assets as of end-April, its factsheet showed.
JPMorgan Asset, according to Ebrahim, went overweight on China after the lows of the third quarter last year and subsequently booked some profits to turn neutral as economic indicators continued to disappoint.
Ebrahim is hopeful about Chinese consumption even though recent data show the recovery has weakened. Manufacturing activity contracted again in May, while home price growth slowed after a pickup earlier in the year. In the latest sign of economic gloom, China’s exports fell for the first time in three months in May.
He added that his firm is looking at shares of component manufacturers and those tied to domestic spending. He prefers smaller stocks over larger peers.
--With assistance from Shen Hong, Yvonne Man and David Ingles.
