US investor appetite grows for Chinese stocks despite market bloodbath and trade worries

  • US funds have continued to add Chinese stocks to their holdings in recent months as local investors exit
  • ‘Bottom line is, we are bullish on Chinese stocks,’ says T Rowe Price equity CIO Justin Thomson
PUBLISHED : Thursday, 20 December, 2018, 5:44am
UPDATED : Thursday, 20 December, 2018, 6:23am

A stock market bloodbath in China this year may have spooked investors in the country, but Wall Street fund managers see bargains in the carnage.

First Wilshire, a Pasadena, California-based firm managing about US$400 million of US capital, is among US investment managers that have been adding Chinese stocks in recent months.

It aims to increase its holdings of Chinese shares to about 30 per cent, equivalent to about US$120 million, up from a little less than US$100 million at the beginning of the year.

“When we saw [Chinese] people on the street no longer liked the stock market back in July, we loved it. Because it was precisely the time when we can find great discounts,” said First Wilshire CEO Scott Hood, whose firm has invested in China for more than four decades.

And discounts they found. Stocks on the Shanghai Stock Exchange have dropped 23 per cent in value so far this year, with the composite Shanghai index losing nearly 1,000 points to 2,550 on Wednesday.

Even the biggest tech names have dropped significantly.

In Hong Kong, Tencent has lost more than a third of its market value so far this year, Meituan-Dianping has plunged 34 per cent since making its debut two months ago and Xiaomi has plummeted 50 per cent since its July IPO.

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Like First Wilshire, many US money managers are looking beyond the worsening US-China relationship and betting that growth through innovation and domestic consumption in China will offset the effects of trade tensions and a bilateral relationship in turmoil.

“Bottom line is, we are bullish on Chinese stocks,” Justin Thomson, chief investment officer of equity at T Rowe Price Group, a Baltimore, Maryland investment firm with assets under management of more than US$1 trillion, told the South China Morning Post.

“The government has quite a few tools in the tool box to stimulate the markets with tax cuts and easing lending requirements.”

JPMorgan’s analysts shared Thomson’s optimism.

In a positive sign for the stock market, “fiscal policy will take the driver’s seat, with focus on tax cuts, supplemented by a modest support for infrastructure investment”, JPMorgan analysts led by Haibing Zhu wrote in a December 10 report.

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Besides its recently announced cuts in individual income tax for households and tariff cuts and higher tax rebate for exporters, China also is expected to implement reductions in the value-added tax and social security contributions, the analysts said, adding that it also could cut the corporate income tax.

The “recent selling in both Chinese and US tech stocks has been painful, but we see it potentially creating more attractive entry points for long-term investors,” wrote Kate Moore and Lucy Liu, analysts with BlackRock, which has a world-leading US$6 trillion of capital under management, in a November 8 report.

“Chinese tech is an innovative hub tailoring experiences and services for a distinct domestic user,” they wrote.

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“We believe valuations may be nearing bottom. For those with a long-term mindset and stomach for short-term volatility, we believe it may be an opportune time to step in,” the Moore-led analysts wrote.

The strong appetite among US investors can also be seen towards the private equity market in China – an area less accessible to retail investors because these companies do not raise capital publicly.

Many of these companies are relatively early-stage technology ventures with high investment risks.

US investment firms raised a total of US$4.8 billion in capital, focusing on Chinese private equity investments, as of December 18 this year. The figure more than doubled the US$2.3 billion these firms raised for all of 2017, according to financial data provider Preqin.

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The bargain hunting comes as analysts and investors see the uncertainty of the US-China trade war persisting.

Although US President Donald Trump and Chinese President Xi Jinping reached a truce and agreed to resume talks in Argentina earlier this month, not many believe a comprehensive trade deal will materialise by the end of the 90-day deadline, on March 1.

“You look at the market that has been rocked by the volatility and the uncertainty over the last several months, [and] quality still comes out and investors still believe in the long-term story,” said Betty Liu, the New York Stock Exchange’s executive vice chairman.

“It’s important to be selective and find businesses that are going to survive the short-term volatility.”

Investors like First Wilshire are trying to do just that.

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“As value investors, we look for businesses with local dominance in sectors that are fast growing,” said Hood, First Wilshire’s CEO. “They include consumer staples and construction material stocks.

“And we are not going to sit here and time the market. At some point, you will have to plug your nose and dive in.”