China Investors Search for Turning Point After $370 Billion Rally

(Bloomberg) — With Chinese markets prone to sharp turns followed by long and powerful trends, the time to buy is almost as important as choosing what to buy.

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Investors who jumped into Chinese stocks on Nov. 11 when Beijing cut Covid-19 quarantine periods and demanded testing returned in a rally that added nearly $370 billion to the value of equities in the MSCI China Index.

Others are still waiting for clearer signs after Wall Street got it so wrong this time last year. Goldman Sachs Group Inc., JPMorgan Chase & Co. and BlackRock Inc. among those who advocated piling into the market then, only to lose more than $4 trillion in value over the 10 months to October.

“China’s policies are like a huge freight train coming down the track,” said John Lin, portfolio manager for China equities at AllianceBernstein in Singapore. “The first thing you do is get out of the way. Don’t wait on the road! Then the moment you can, jump on the train.”

Ahead of the Curve

Abrdn Plc is among those who already see opportunities in the nation’s corporate bonds following Covid policy changes and a comprehensive package of measures to help the property sector.

Investors may also position themselves immediately to take advantage of a likely steepening of China’s government bond yield curve as the economy reopens from Covid, according to Ray Sharma-Ong, portfolio manager of multi-asset and investment solutions at abrdn.

“Go to the front of the curve while going short on the back,” said Sharma-Ong. In his view, a better outlook for growth will put pressure on back-end rates and front-end rates in China’s supportive monetary policy.

Dollar-denominated Chinese corporate bonds already offer opportunities with yields of around 8%, he said. Investment in local currency corporate bonds comes with a positive 2% carry bonus after investors hedged the yuan back to the dollar, according to Sharma-Ong, who expects the Chinese currency to continue strengthening.

Equity attraction

M&G Investments (Singapore) Pte. and Eastspring Investments Singapore Ltd. is in the market buying Chinese stocks. Eastspring argues they can’t get much cheaper and M&G likes domestic consumer brand names, original equipment manufacturers for electric and traditional vehicles, and factory automation.

“We’re very close to trough valuations and also very close to heavy earnings assumptions,” said Bill Maldonado, chief investment officer of Eastspring, which oversees $222 billion. “​​​​You would be buying now and expecting things to kind of return on a three to six month basis.”

Catherine Yeung, investment director at Fidelity International, said that so much negative news flow has already been factored into China’s stock price that the worst is probably over for investors.

Insights of Christmas

For those still on the fence, the Politburo meeting in early December, followed by the Central Economic Work Conference soon after, may offer useful signals.

Jason Liu at international private bank Deutsche Bank AG plans to keep a close eye on state media around this time. News from the closed-door work conference, which will bring policymakers together to review the economy this year and set goals and tasks for 2023, could be a catalyst for more trades to reopen.

“We may see some signals from the top leadership,” said Liu, who expects near-term volatility in Chinese assets and a “very gradual” shift away from Covid Zero in the coming quarters.

Liu recommends looking past the likely downturn and taking a broad position in Chinese equities, including the technology sector, to take advantage of a gradual shift in market sentiment.

He also sees the yuan as attractive because of its likely appreciation in the first half of next year. Liu does not recommend credit for now, saying it may take longer for the property market to improve.

Any early hints about the economic growth target for next year — estimated to be around 4.8% according to economists surveyed by Bloomberg — will help guide market sentiment.

Spring pivot

Morgan Stanley is among those with high hopes for an acceleration of China’s economic opening in the spring, when the weather turns friendlier, vaccinations could increase and the National People’s Congress in March looms become a key event for market-moving developments.

Investors who were overweight in Chinese assets could shift to neutral positions around this time, according to Andrew Sheets, chief cross-asset strategist at Morgan Stanley.

China’s consumer companies focused on the town stand to benefit, according to Morgan Stanley.

“If investors get a break from the Fed and China reopening, and stronger growth in the second half of 2023, I think they will look at that as a positive backdrop for a lot of different emerging market assets,” Sheets said.

The Future

The reopening of the economy from Covid could drive a positive swing in inflows to China’s equity markets in 2023 amounting to 1% of gross domestic product, according to Bloomberg News macro strategist Simon Flint. This will subsequently be the yuan’s buoy, he said.

James Leung, head of multi-asset Asia Pacific at Barings, recommends aligning Chinese stock portfolios with government policy priorities by investing in the electric vehicle sector, renewable energy and the hardware technology supply chain.

Like Barings, AllianceBernstein sees stocks in energy and technology security as low-hanging fruit for investors, as long as the companies are aligned with government goals.

The market has changed from the era before the pandemic and regulatory crackdown, when investors would chase the latest tech and biotech blockbusters “and then watch the money grow 10 times, 100 times,” Lin said. AllianceBernstein. “You can still get growth now, but it has to be policy sensitive.”

–With assistance from Ruth Carson, Sofia Horta e Costa, Ishika Mookerjee and Abhishek Vishnoi.

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