HSBC, Union Bancaire side with China stock signals on downside while Dalio tells sceptics not to be scared after US$1.2 trillion sell-off
- Wealth managers at HSBC, Union Bancaire Privee see short-term downside risks to China markets after the biggest rout since January 2016
- Bridgewater’s Dalio tells China sceptics not over-focus on the wiggles of crackdown and ‘do not let that scare you away’
The slump, the biggest shakeout in more than five years, handed investors a reminder about a market built on “Confucian hardware and Soviet software” as described by hedge fund giant Bridgewater Associates. Its founder Ray Dalio, a China optimist, told sceptics not to be scared by the latest regulatory lashing and to focus on the nation‘s decades-long market-friendly reforms.
Wealth managers at HSBC and Union Bancaire Privee, watching the size and speed of the market rout, are instead listening to the market history by predicting more downside to stocks until some semblance of policy clarity is restored.
“The regulatory changes entail further downside pressures in the short-term, as investors reprice these uncertainties,” said Carlos Casanova, senior economist at UBP, a Swiss private bank with US$178 billion in assets under management. The housing sector and other dominant “new economy” operators could be the next targets, he said in a report last week.
Onshore stocks suffered a US$434 billion beating in July while those in Hong Kong slumped US$752 billion, according to Bloomberg data. That is the most since a US$2.4 billion plunge on a combined basis in January 2016, despite reassurances from officials and state-run media.
“In the short-term, the regulatory uncertainty makes it difficult to predict how events might pan out,” said Xian Chan, chief investment officer for wealth management at HSBC, which manages some US$400 billion of clients’ assets. “What we know is that the so-called risk premium has increased for Chinese equities,” he said in a report on July 28.
Chan does not think investor sentiment can improve significantly over the coming three to six months, saying it’s prudent to downgrade Chinese equities to neutral on a tactical basis. “It’s still too early to go bottom-fishing.”
More importantly, China’s top policymakers remain unrelenting in their campaign against the fast-growing industries deemed to be wielding excessive influence over the broader economy. Their failure to more clearly communicate the reasoning to the investing public is “unfortunate”, Dalio said in a July 30 post on LinkedIn.
It’s unclear how Bridgewater has navigated the market turmoil. The hedge fund’s top long-holdings on March 31 included the American depositary shares of Alibaba Group Holding, Pinduoduo, JD.com, Baidu, NIO and KE Holdings, according to filings. Alibaba owns the South China Morning Post .
While NIO has gained US$11.9 billion in market value since then, the other five companies have lost a combined US$167 billion over the four-month period, according to Bloomberg data.
“In this rapidly developing capital markets environment, Chinese regulators are figuring out appropriate regulations so, when they are changing fast and aren’t clear, that causes these sorts of confusions, which can be misconstrued to be anti-capitalist moves,” Dalio said.
“I urge you to not misinterpret these sorts of moves as reversals of the trends that have existed for the last several decades and let that scare you away.”
That message may be for investors who fled to the comfort of bonds during the slump. The flight to safety compressed the yield on 10-year Chinese government bond to a one-year low of 2.874 per cent last week.
Citic Securities, China’s biggest publicly traded brokerage, says that the risk stemming from the regulatory scrutiny will linger for a while and it will trigger redemptions or forced liquidation of stock holdings.
With Beijing seeking to improve the livelihood and reduce the cost of living for the population, the health care industry will probably face strong headwinds as well, given public complaints about high drug prices, according to GF Securities and China Galaxy Securities.
“Looking forward, the roll-out of regulatory policies may become a new norm,” said Zeng Wanping, an analyst at China Galaxy Securities. “There’s no rush to buy on dips. Let’s wait for the risks to be fully unfolded and assessed.”
Additional reporting by Iris Ouyang