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Chinese investors look for turning point after rally to $370 billion

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(Bloomberg) — With Chinese markets prone to sharp turns after long and powerful trends, the timing of buying is almost as important as choosing what to buy.

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Investors who jumped into Chinese stocks on Nov. 11, when Beijing cut quarantine periods for COVID-19 and rolled back testing, added nearly $370 billion to the value of stocks in the MSCI China index.

Others are still waiting for clearer signs after Wall Street got it wrong this time last year. Goldman Sachs Group Inc., JPMorgan Chase & Co. and BlackRock Inc. were among those who recommended bulking up the market at the time, with more than $4 trillion in value destroyed in the 10 months to October alone.

“Chinese policy is like a huge freight train getting on track,” said John Lin, China equities fund manager at Alliance Bernstein in Singapore. “The first thing you do is get out of the way. Don’t stay on track! So hop on the train as soon as possible.

China’s benchmark CSI 300 index is up nearly 8% from this year’s low in late October as Covid cases continue to rise. Daily infections rose above 30,000 for the first time on Thursday as authorities struggled to contain outbreaks that sparked new restrictions in some of the largest cities.

before the bend

Abrdn Plc is among those already seeing opportunities in the country’s corporate bonds following Covid policy changes and a comprehensive package of measures to support the real estate sector.

According to Ray Sharma-Ong, a multi-asset and investment solutions fund manager at Abrdn, investors can create positions immediately to take advantage of a potential downturn in the Chinese government bond yield curve as the economy reopens post-Covid.

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“Go at the front of the curve while going short at the back,” Sharma-Ong said. Better growth prospects would lead to higher interest rates, while China’s supportive monetary policy would come with interest rates, he added.

Chinese dollar-denominated corporate bonds already offer yields of around 8%, he said. According to Sharma-Ong, who expects the yuan to remain strong, investing in local currency corporate debt will give investors a 2% positive carry bonus after the yuan reverts back to dollars.

attractive equity

M&G Investments (Singapore) Pte and Eastspring Investments Singapore Ltd are in the market to buy Chinese equities. EastSpring says they can’t get much cheaper, while M&G favors domestic consumer brands, original equipment manufacturers for electric and conventional vehicles, and factory automation.

“We are very close to bottom valuations and very close to very low earnings expectations,” said Bill Maldonado, EastSpring chief investment officer. “You would buy now and expect things to recover in three to six months.”

Catherine Yeung, investment director at Fidelity International, said so much negative news has already poured into the price of Chinese stocks that the worst is likely for investors.

December insight

For those still on the fringes, a Politburo meeting in early December, followed by the annual Central Economic Action Conference, could send useful signals.

Jason Liu of Deutsche Bank AG’s international private bank plans to monitor state media at this time. News of this year’s closed-door working conference bringing policymakers together to review the economy and set goals and actions for 2023 could be a catalyst for reopening trade.

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“We may see some signals from top leadership,” said Liu, who expects Chinese assets to show near-term volatility and a “very gradual” transition to Covid-zero in the coming quarters.

Liu recommends taking broad positions given the potential desire of Chinese stocks, including the technology sector, to benefit from a gradual shift in sentiment.

He also sees that the yuan may appreciate in the first half of next year. Liu doesn’t recommend credit at this point, saying it may take longer for the real estate market to recover.

spring spindle

Morgan Stanley is among those expecting a boost in China’s spring economic opening, when the weather becomes more favorable, vaccinations may increase and the National People’s Congress in March emerges as a key market-moving event. comes in

According to Andrew Sheets, chief cross-asset strategist at Morgan Stanley, investors underweight Chinese assets could turn neutral this time around.

China’s domestically-focused consumer companies will benefit, the investment bank said.

Sheets said, “As investors face a stalled Fed and China’s reopening and strengthening of growth in the second half of 2023, I think they’ll see it in a number of different emerging market assets.” will be seen as a positive backdrop for

Future

According to Bloomberg macro strategist Simon Flint, reopening the economy from Covid could result in positive inflows into Chinese stocks, equivalent to 1% of GDP in 2023. He said this would lead to a rise in the yuan.

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

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AllianceBernstein views energy and technology security stocks as low-hanging fruit for investors, as long as the companies are aligned with government goals.

Alliance Bernstein’s Lin said the market has changed from the pre-pandemic and regulatory era, when investors hunted for the latest technology and biotech darlings and then saw the money multiply 10x, 100x. “Now you can still find growth, but it has to be a policy-sensitive kind of finding.”

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

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