Market gloom spurs fund managers to scour hidden gems

SINGAPORE: The relentless sell-off in Chinese stocks has made the market the worst performer in the world over the past three years.

And that is exactly the reason some funds are looking to unearth pockets of value.

They see a contrarian signal in the extreme pessimism toward Chinese assets in recent months amid an economic slowdown, unpredictable government crackdowns and rolling property woes.

Global funds as a whole have slashed their China stock positioning to the lowest since October, which to some means more room for potential buying.

“China has a growth problem today, but not a systemic crisis,” said John Lin, Singapore-based chief investment officer for China equities at AllianceBernstein, which oversees US$694bil globally.

“The way you make money is you have to go company by company. There’s a lot of nice cashflow companies, nice dividend-yield companies that are still under-appreciated.”

The MSCI China Index has tumbled 55% from a high set in February 2021, while a gauge of mainland firms traded in Hong Kong has slumped 50% and is the worst performer of 92 global indexes compiled by Bloomberg over the past three years.

One of the major drivers of the downtrend has been selling by global funds.

After making net purchases earlier this year, offshore money managers offloaded a record US$12bil of mainland shares in August via trading links with Hong Kong, and have sold another US$3.2bil this month.

That bearish positioning opens up the prospect of a rebound, while signs of stabilisation in parts of the economy mean it makes sense to look for value now, bulls say.AllianceBernstein’s Lin says he favours firms in China’s local share market, which is primarily traded by domestic investors.

“We like A shares because they are more domestic oriented, and therefore are less susceptible to capital flows based on geopolitical tensions,” he said.

“You can find a lot of interesting stocks that have their own idiosyncratic dynamics.”Some of the most attractive firms are industrial-cyclical stocks such as bus-makers and diesel-engine makers that export to places like Asean, central Asia and Middle East, and also have a presence in the domestic market so they will participate in the eventual local economic recovery, he said.For Amundi SA, China’s health-care stocks are where it sees value.

Medical shares have been beaten down amid an anti-corruption clampdown but the sector has probably already reached a bottom with all the bad news in the price, said Nicholas McConway, head of Asia ex-Japan equities at Europe’s largest money manager in London.

McConway is focusing on companies that are self-funded with robust drug pipelines.

The prospect that global central banks are nearing an end to interest-rate hikes may also favour these companies as they can take years to turn profitable so tend to perform better in a lower-rate environment, he said.

Guinness Global Investors favours pharmaceutical names that are transitioning from generic drugs to developing new products themselves or acquiring them through mergers and acquisitions.

Examples include CSPC Pharmaceutical Group Ltd, Sino Biopharmaceutical Ltd and China Medical System Holdings Ltd, said Sharukh Malik, a fund manager at Guinness Global in London who has spent the last eight years investing in Asian stocks. — Bloomberg

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