(Bloomberg) — The rout in Chinese stocks is so deep and long that even some skeptics are bracing for at least a near-term rebound.
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Bell Asset Management Ltd., long bearish, is now scouring the market because shares are “so cheap,” while Abrdn Plc is seeking exposure through options. JPMorgan Asset Management and BlackRock Inc. see rebound potential as valuations have become attractive.
Their views underscore a tactical shift in global investor sentiment toward China. Although the country’s economic slowdown and political uncertainties have caused global long-term funds to withdraw en masse, at least some investors see potential for a technical rebound at such low valuations.
Investors are aware that when the right catalysts come into play – such as Covid reopening in late 2022 – the market can recover strongly. Signs are emerging that options traders are preparing for this possibility. Call options on a large U.S.-listed Chinese stock ETF surged last week, even as major stock benchmarks stumbled. The MSCI China index lost almost 5% in 2024 after a third consecutive annual loss.
Ned Bell, chief investment officer at Bell Asset Management, who has avoided Chinese stocks for nearly a decade, is considering buying big tech stocks, including Tencent Holdings Ltd., as regulatory concerns ease.
“We are less bearish and we are selectively looking for value,” said Bell, whose Melbourne-based firm manages A$5.1 billion ($3.4 billion) of global equities. The last time he owned mainland shares was in December 2014.
Bell’s cautious approach highlights the extent to which Chinese stocks have become something of a global pariah in recent years, with fund managers doubting the value of their investments. The market failed to benefit from last year’s global recovery as tensions with the United States escalated and Beijing showed only a lukewarm response to reviving the economy.
Yet the selloff has pushed valuations near historic lows. The MSCI China index, down about 60% from its 2021 peak, trades at less than nine times its forward earnings estimates. This compares to a reading of 22 for the MSCI India and 19 for the S&P 500.
Read: China’s Wall Street bulls seek redemption after tough year
JPMorgan Asset Management, which has a neutral view on the country’s stocks, anticipates a rebound once the earnings cycle reverses.
“The valuation is certainly very attractive and the positioning seems quite light,” said Sylvia Sheng, global multi-asset strategist at the fund manager. “We have seen a stabilization of macroeconomic dynamics, but we believe this will gradually lead to a stabilization of the profit reduction trend.”
China’s economy appears to have bottomed out, but the coming recovery looks slow and bumpy. Data due Wednesday will likely show the economy grew 5.2% over the whole of last year, meeting its growth target. The news has been more mixed recently, with consumer prices falling further but exports showing signs of stabilization.
For many, however, creating direct exposure remains a risky bet. Chinese stocks started the year poorly, ranking among the worst on major global indices.
With geopolitical tensions complicating Beijing’s technology ambitions and deflationary pressures growing, the market is unlikely to regain its former influence anytime soon. Some investors are turning to options to protect against a possible recovery, given that hopes of a recovery last year were repeatedly dashed.
“We have been neutral for the last three quarters, but we are now starting to see value,” said Louis Luo, head of multi-asset investment solutions for Greater China at Abrdn. “We are looking at buying some upside protection” in case the stock market rises and weighs on the relative performance of emerging market funds, he said.
The total volume of options traded on the iShares China Large-Cap ETF climbed to nearly 500,000 contracts last Wednesday, the second peak at such levels in less than a month. The number of calls traded that day was more than double the amount of the put contracts.
The Hang Seng China Enterprises Index, a gauge of Chinese stocks traded in Hong Kong, has more calls outstanding than puts.
BlackRock’s Thomas Taw agrees that valuations look attractive, but notes that China is a “very difficult market.”
“We are getting to a point where it is worth having some tactical exposure to China in your portfolio and investors should still invest in China – but it may be difficult to pick when we will see some recovery,” said Taw, Head of APAC iShares Investment Strategy at BlackRock Asset Management North Asia. “Most investors view this as a trading market rather than a long-term secular market.”
For those who have held on to their China bets throughout the rout, now may be the time to be more bold.
Invesco Ltd. is moving toward companies it believes will deliver earnings growth, and moving away from the stable dividend-paying companies it has held in recent years.
“In China, we want to go for growth,” said William Yuen, chief investment officer of Invesco in Hong Kong, which is overweight Chinese stocks in its Asia ex-Japan strategies. The asset manager is interested in technology companies after a period of regulatory uncertainty because “companies are in a much clearer operating environment where they understand what they can do,” he said.
–With the help of Jeanny Yu.
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