Sell-off in Chinese stocks overdone, ‘downside limited’: Hong Kong fund manager

Chinese stocks are close to bottoming out as concerns about the economy and property sector outlook are overdone, according to a Hong Kong-based money manager.

Cheap valuations and bearish investor sentiment suggest that the recent sell-off in Chinese stocks could be overstretched, while stabilising economic data should provide grounds for more optimism, said Yu Chenjun, deputy chief investment officer of equities at Value Partners.

“There’s no need to be pessimistic at this point,” Yu stated. “Most of the risks have been taken into consideration, and the downside is quite limited.”

The MSCI China Index, which tracks 717 Chinese companies listed at home and abroad, has declined 11 per cent since the end of July to close to a 11-month low, as Beijing’s piecemeal stimulus disappointed the market while the property crisis deepened. The price-to-earnings ratio of the gauge stood at 11.85 on average, the lowest in five years.

Overseas investors have sold a record US$17.5 billion worth of A shares during the past two months, trimming the net inflow this year to US$16.2 billion, according to data compiled by Goldman Sachs. Global funds’ China exposure is now at a decade-low, the US bank said.

“I think overseas investors are panicking, but it’s often during these moments of panic that we see a bottoming out of the market,” Yu said.

Golden week offers hope for China’s battered consumer stocks

Things are not as dire as they may seem, as recent economic data has shown that the economy has started to stabilise, he said.

China’s manufacturing activity in September expanded for the first time in six months, data released over the weekend showed. Sales of top 100 developers declined 29.2 per cent year on year last month, an improvement from the 33.9 per cent slump in August, according to data from China Real Estate Information Corporation.

Beijing will continue to implement supportive measures to bolster the economy and prevent a further slowdown, while the spillover effect of the property crisis is expected to be limited, as the worst is behind us, Yu said.

“The market is at a relatively low position, and some Chinese companies still provide a yield of around 5 to 6 per cent annually,” Yu said. “Additionally, there may be some upside opportunities. I believe that’s quite attractive for long-term investment returns.”

Value Partners, the first money manager to go public in Hong Kong in 2007, has seen net redemptions increase in recent years. It had US$5.9 billion of assets under management on March 31, compared with the US$15 billion at the end of 2019.

The firm’s flagship Value Partners Classic Fund has declined 1.9 per cent this year after taking a 28 per cent beating in 2022. China-focused funds had fallen 7 per cent by the end of September, according to Goldman.

The fund is bullish on Taiwan Semiconductor Manufacturing Company, which accounts for 9.2 per cent of its portfolio and was its top holding as of end-August, fund data showed. The fund is also heavily skewed to Tencent Holdings, Meituan and PDD, while online broker East Money Information and China Telecom have fallen off the list of top holdings compared with last year.

Yu favours Chinese e-commerce companies, particularly those capable of expanding their market globally, noting that they have the potential to post substantial incremental growth. He also likes artificial intelligence and hardware technology companies, including those involved in the development of humanoids and augmented reality devices.

“In the near term, it’s understandable if some people pull out of China and look for better opportunities elsewhere,” Yu said. “But as a global investor you just cannot overlook this market. If you have a longer investment horizon and patience, you should position yourself ahead of time.”