The nascent rebound in Chinese shares is at risk of becoming yet another false dawn as foreign investors seem unconvinced that policymakers can revive a faltering economy.
US and European long-only fund managers were net sellers of Chinese and Hong Kong stocks in July, according to Morgan Stanley, which is now advising clients to take profits on the recent rally and has downgraded China to “equal weight”. The FTSE China A50 Index is the only one of 10 major global equity benchmarks tracked by Citigroup Inc on which investors had a short position as of end-July.
That is even as key indexes in China and Hong Kong capped their best month since January after the Politburo meeting, where top leaders signalled more support for the troubled real estate sector alongside pledges to boost consumption. The Hang Seng China Enterprises Index, which tracks major Chinese shares listed in Hong Kong, has fallen this week amid a risk-off global backdrop following a 6.1% surge over the previous five sessions.
“We have seen this before — strong rally not holding up,” said Michael J Oh, a San Francisco-based portfolio manager at Matthews Asia. “I don’t think most global funds are really buying into China in any meaningful way yet,” he said, adding that the recent rebound is more a result of investors reversing their bearish bets.
In another indication that optimism around authorities’ pledges is fading, overseas funds that invest in onshore China stocks via trading links with Hong Kong were set to be net sellers for a second straight session on Thursday. That is after they piled into the market in the previous six days.
Beijing is fighting an uphill battle in trying to revive an economy that has continued to lose steam, but for now, has offered more words than action. It vowed to boost consumption and support private enterprises but stopped short of handing out cash to families or offering tax breaks to businesses. Officials asked localities to roll out policies to stabilise the property market but provided no details.
See also: Wall Street's uber bull Tom Lee makes next bold bet in ETF era
“The July Politburo meeting signalled policy easing, but key issues including LGFV debt, the property and labour markets and the geopolitical situation need to improve significantly, in our view, for sustainable inflows and further re-rating,” Morgan Stanley equity strategists including Jonathan Garner and Laura Wang wrote in an Aug 2 note.
“We believe investor confidence and conviction level are still very fragile, and that investors are still reluctant to pre-position in a major way, given that they have been disappointed by rather lacklustre/lukewarm easing measures seen since March.”
‘Can’t just talk’
While global fund managers remain cautious, some may consider paring their underweight positions because sentiment has been bearish and valuations have fallen, said Vivian Lin Thurston, Chicago-based partner and portfolio manager at William Blair Investment Management.
Priced at less than 11 times forward one-year earnings, the MSCI China Index is below its five-year average multiple of over 12 times. It is valued at a 14% discount versus the MSCI Emerging Markets Index, compared with the average 4% discount since 2010.
From here, investors will likely need to see authorities making lending to businesses easier and supporting the housing market before turning more bullish, William Blair’s Thurston said. “Some money and fiscal incentives need to come through. You can’t just talk without the monetary support.”
Thurston said she believes investors should focus more on stock picking due to uncertainties around stimulus and macro policies. She favours sectors less prone to weak consumer sentiment, including liquor, internet and athletic footwear.
For now, the lack of concrete measures has only intensified concerns that China’s economic problems have no quick fix, making a sustainable equity rebound harder to come by.
“Our recommended strategy is selling into strength on any announcement that is going to create some optimism,” said Arthur Budaghyan, Montreal-based chief emerging markets strategist at BCA Research Inc. The stock rally won’t last long “because eventually, the business cycle and corporate profits will disappoint again,” he said. — Bloomberg
