Chinese stocks foment recovery as JPMorgan says buy amid elevated bets among short-sellers

Short bets against top stocks in Hong Kong surged on Monday and remained elevated despite more than a 35 per cent drop in the Hang Seng in 2022
JPMorgan says the latest sell-off is ‘disconnected from fundamentals’ and presents opportunity for investors to accumulate

China stock market

Jiaxing Liin Hong KongandZhang Shidongin Shanghai

Published: 4:32pm, 25 Oct 2022

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Chinese stocks traded in Hong Kong are seeking to find a floor after a rout earlier this week, aided by bullish market calls from analysts. That is being challenged by a surge in short-selling positions in some of the market’s biggest heavyweights.

The Hang Seng Index slumped as much as 1.5 per cent below the 15,000-level, before ending with a 0.1 per cent loss at the close of trading on Tuesday. The Tech Index surged 3 per cent. This followed a sell-off on Monday when the city’s benchmark index crashed 6.4 per cent, the most since the 2008 global financial crisis.

The slump on Monday was “disconnected from fundamentals”, JPMorgan Chase’s market strategists led by Marko Kolanovic said in a note published on the day. “We believe this is a good opportunity to add, given an expected growth recovery, gradual Covid reopening, and monetary and fiscal stimulus.”

Hong Kong Chief Executive John Lee Ka-chiu acknowledged on Tuesday that volatility in the city’s stock market was high, but assured investors trading activities were running smoothly.

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China’s bank regulator issued a statement to affirm its commitment to preserve financial stability in the capital markets, in keeping with the spirit of the Communist Party’s recent congress.

“The strengthening trend of the renminbi remains unchanged,” the China Banking and Insurance Regulatory Commission said in a statement, adding that the Chinese economy’s trade surpluses and net foreign direct investments provide a strong basis for a stable yuan. The regulator said it will be on guard against systemic financial risks.

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JPMorgan forecast the MSCI China Index will more than double to 116 points from 53. Goldman Sachs, which has scaled back its forecasts a few times this year, now sees the index reaching 69 by year-end. The gauge, which tracks 717 stocks at home and overseas worth US$2.3 trillion, is trading at 8.5 times earnings, the cheapest in at least a decade.

China could gradually relax its zero-Covid policy after March next year, and policy implementation is expected to be more efficient as personnel-related issues in the Communist Party have been settled, Goldman Sachs said in a report on October 23.

To be sure, those bets have failed to materialise for much of this year, defying forecasts by peers including Citigroup and Credit Suisse, while stoking losses among global funds. President Xi Jinping last week signalled no let-up in China’s anti-pandemic curbs, and economic report cards showed consumption and exports continued to disappoint. Policy stimulus, too, has underwhelmed expectations.

Shorts, or bets on falling stock prices, remained extended, according to market data. The number of shorts on Alibaba Group Holding jumped by seven times to 21 million shares worth HK$1.34 billion on Monday. That is equivalent to a two-week high of 4.7 per cent of all short bets in Hong Kong.

The ratio of shorts on Tencent stock jumped to 5.1 per cent on Monday, the highest in four weeks, while those on the Tracker Fund also approached a one-month high of 18.4 per cent on October 21.

Open interest on the most active futures contract on the Hang Seng Index, or the outstanding number of unsettled contracts, more than doubled over the past month, according to Bloomberg data. That indicates higher demand for protection from further market losses.

“The current downtrend sees no respite amid China’s slowing economic growth and rising rates in the US,” said Kenny Ng, an equity strategist at Everbright International. “Foreign funds now find US equities more attractive and many of them are getting out of the city’s market.”

China’s embattled property sector shows no sign of recovering as new home prices fell for the 13th straight month in September, the statistics bureau said on Monday. Slowing exports and retail sales are also holding back a full economic rebound, economists say.

“China remains a source of near-term risk as it attempts to resolve issues related to Covid-19 and the property market,” Mark Haefele, chief investment officer at UBS Wealth Management, wrote in a report on October 20. “Trying to pick a bottom [in global markets] is a good way to lose a finger.”

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This has not stopped Anthony Wong at Allianz Global Investors from calling the end to the zero-Covid policy in the near term, according to a Bloomberg report. The lead manager for the US$1.2 billion All China Equity Fund said it is time to buy shares in the tourism and leisure sectors, such as duty-free shops and hotel chains.

“It is still a contrarian call at this point because market expectation of reopening is coming down,” said Wong in Hong Kong. “We do believe that it is going to happen eventually, and hopefully within the next six months. And as usual, equities will move faster than fundamentals because of investor expectations.”