Chinese investors are looking for a turning point after a $370 billion rally

(Bloomberg) — With Chinese markets prone to sharp turning points followed by long, powerful trends, knowing when to buy is almost as important as choosing what to buy.

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Investors who jumped into Chinese stocks on Nov. 11 as Beijing eased Covid-19 quarantine periods and dialed back testing shared a rally that added almost $370 billion to the value of stocks in the MSCI China Index.

Others are still waiting for clearer signals after Wall Street went so wrong this time last year. Goldman Sachs Group Inc., JPMorgan Chase & Co. and BlackRock Inc. were among those who recommended a market rally then, only to see more than $4 trillion in value wiped out in the 10 months to October.

“China’s policies are like a giant freight train coming down the tracks,” said John Lin, fund manager of China equities at AllianceBernstein in Singapore. “The first thing you do is get out of the way. Don’t stay on track! Then jump on the train as soon as you can.

China’s benchmark CSI 300 is up about 8 percent from this year’s low set in late October, even as Covid cases rise. Daily infections climbed above 30,000 for the first time on Thursday as officials struggled to contain outbreaks that prompted new restrictions in some of the biggest cities.

Ahead of the curve

Abrdn Plc is among those already seeing opportunities in the nation’s corporate bonds following Covid policy changes and a massive package of measures to support the property sector.

Investors can also position themselves immediately to take advantage of a likely steep rise in China’s government bond yield curve as the economy reopens from Covid, according to Ray Sharma-Ong, fund manager at Multi Asset Solutions and investment in abrdn.

“Go on the front end of the curve while going short on the back end,” Sharma-Ong said. Better growth prospects will push interest rates higher on the tail end, while China’s supportive monetary policy will contain interest rates on the front end, he said.

Dollar-denominated Chinese corporate bonds now offer opportunities with yields of around 8%, he said. Investing in local currency corporate debt comes with a 2% positive carry bonus as investors hedge the yuan against the dollar, according to Sharma-Ong, who expects the yuan to continue to strengthen.

Attractive shares

M&G Investments (Singapore) Pte and Eastspring Investments Singapore Ltd. are in the market buying Chinese stocks. Eastspring says they can’t get much cheaper, while M&G prefers consumer brands aimed at the domestic market, OEMs for electric and traditional vehicles and factory automation.

“We’re very close to the lowest valuations and very, very close to the lowest earnings assumptions,” said Bill Maldonado, chief investment officer at Eastspring, which oversees $222 billion. “You’re going to buy now and expect things to pick up in three to six months.”

Catherine Jung, chief investment officer at Fidelity International, said so much negative news has already been priced into Chinese stocks that the worst is probably over for investors.

Insights for December

For those still on the sidelines, the Politburo meeting in early December, followed by the annual Central Economic Work Conference, may offer useful cues.

Jason Liu of Deutsche Bank AG’s international private bank plans to monitor state media at the time. News from a closed-door work conference that will bring policymakers together to review the economy this year and set goals and targets for 2023 could be the catalyst for further reopening of deals.

“We may see some signals from senior management,” said Liu, who expects short-term volatility in Chinese assets and a “very gradual” move away from Covid Zero over the next few quarters.

Liu recommends ignoring the likely volatility and taking a broad position in Chinese stocks, including the technology sector, to take advantage of the gradual shift in sentiment.

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

Spring axle

Morgan Stanley is among those with high hopes for an acceleration of China’s economic opening in the spring, when the weather turns more favorable, vaccinations may increase and China’s National People’s Congress in March looms as a key event for market movement.

Investors who were short on Chinese assets may shift to neutral at that time, according to Andrew Sheets, chief cross-asset strategist at Morgan Stanley.

According to the investment bank, Chinese consumer companies focused on the domestic market can benefit.

“If investors are presented with a Fed pause and China reopening and growth is stronger in the second half of 2023, I think they will see that as a positive backdrop for a lot of different emerging market assets,” he said. Sheets.

The future

The re-opening of the economy by Covid could lead to a positive surge in inflows into China’s stocks in 2023, equivalent to 1% of gross domestic product, according to Bloomberg macro strategist Simon Flint. This, in turn, will support the yuan, he said.

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

AllianceBernstein sees energy and technology security stocks as low-hanging fruit for investors as long as companies are aligned with government targets.

The market has changed from the pre-pandemic era and regulatory crackdown, when investors looked for the latest tech and biotech darlings “and then watched the money grow 10-fold, 100-fold,” AllianceBernstein’s Lin said. “You can still find growth now, but it has to be a policy-sensitive kind of search.”

–With help from Ruth Carson, Sofia Horta e Costa, Ishika Mukherjee and Abhishek Vishnoi.

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