Be greedy when oth­ers are fear­ful

Financial Mirror (Cyprus) - - FRONT PAGE -

as War­ren Buf­fett may or may not have said. Ei­ther way, when it comes to Chi­nese eq­ui­ties, this is sound ad­vice. The -30% slide in the Shang­hai Com­pos­ite in­dex over the last month stunned a mar­ket in which greed had been pumped up to strato­spheric lev­els by a 153% rally over the pre­vi­ous 12 months. As with all pre­vi­ous lever­age-pro­pelled booms, the runup even­tu­ally rolled over into a delever­ag­ing­driven crash. Un­sur­pris­ingly the at­ten­dant volatil­ity has in­stilled in­vestors with a greatly height­ened fear of own­ing Chi­nese stocks.

At first glance, in­ter­na­tional in­vestors did not need to worry too much. As far as most were con­cerned, the sell-off in on­shore Chi­nese Ashares was an iso­lated event, given that for­eign­ers owned only a tiny frac­tion of do­mes­ti­cally-listed eq­ui­ties. But as the slump in­ten­si­fied, Asian com­pa­nies which de­pend on Chi­nese de­mand, or that are prox­ies for China’s growth, found them­selves in­creas­ingly vul­ner­a­ble to selling pres­sure. Ja­panese tourism­re­lated stocks, Korean ex­porters and Aus­tralian min­ers all tum­bled much more than their re­spec­tive home mar­kets.

Mean­while, main­land in­vestors, who had been caught off-guard by the whole­sale sus­pen­sion of A-shares and the bans on stock sales im­posed by Chi­nese reg­u­la­tors, turned to the Hong Kong mar­ket as a cash ma­chine. Un­able to mon­e­tise their on­shore port­fo­lios, they cashed in shares ac­quired through the Hong Kong mar­ket as a liq­uid al­ter­na­tive. This dy­namic ex­plains, at least in part, why repa­tri­a­tion flows from Hong Kong to main­land China through the Shang­hai-Hong Kong Stock Con­nect chan­nel have surged to more than RMB1trn a day in the last two weeks, re­vers­ing the usual di­rec­tion of travel. At the same time, the Hang Seng China AH pre­mium in­dex soared to a six year high of 149, in­di­cat­ing that Ashares were val­ued at a 49% pre­mium to their Hong Konglisted coun­ter­parts.

Yet, although val­u­a­tions in Hong Kong may now look at­trac­tive, in­vestors re­main fear­ful. Although Bei­jing has done its ut­most to as­sure the do­mes­tic mar­ket that The Xi Jin­ping Put is firmly in place, the ad­min­is­tra­tive sup­port mea­sures an­nounced on July 11 have cre­ated al­most as many fears as they have quelled. The Un­equal Sell-Off In Chi­nese Stocks, which could have been a healthy delever­ag­ing process, has been badly dis­torted by of­fi­cial in­ter­ven­tion. With a quar­ter of Shang­hai A-shares still sus­pended, there are wide­spread doubts about what will hap­pen when trad­ing re­sumes. And now that the author­i­ties have torn up the rule­book, it will in­evitably take time to re­build con­fi­dence in the on­shore mar­ket and to re-es­tab­lish Bei­jing’s com­mit­ment to free mar­ket prin­ci­ples. In the mean­time, the A-share mar­ket’s in­clu­sion in MSCI and FTSE bench­marks will re­main on hold.

On the other hand, the di­rect eco­nomic im­pact of the A- share crash will be small, given that less than 7% of China’s ur­ban pop­u­la­tion own stocks. The Chi­nese prop­erty mar­ket ap­pears to have en­tered a re­cov­ery cy­cle, which re­duces the risk of a hard land­ing. And pol­i­cy­mak­ers have opted to main­tain cur­rency sta­bil­ity, and are act­ing ju­di­cially to sup­port eco­nomic ac­tiv­ity rather than throw­ing cau­tion to the winds in an all-out bid to re-ig­nite growth. Against this back­drop, good qual­ity com­pa­nies are still good qual­ity, but are avail­able at a marked down price.

Hong Kong-listed com­pa­nies are es­pe­cially in­ter­est­ing. Bei­jing’s heavy-handed in­ter­ven­tion has high­lighted Hong Kong’s strengths as a deep, trans­par­ent, well-func­tion­ing mar­ket; a safe place for in­vestors who want a piece of China. The no­tion that Shang­hai or Shen­zhen can re­place Hong Kong as China’s in­ter­na­tional fi­nan­cial cen­ter has been put back by years. With Hong Kong-listed shares at their cheap­est rel­a­tive to global eq­ui­ties in more than ten years, there are plenty of solid stocks that have been un­fairly sucked into the main­land’s slump. Time to get greedy.

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