Chinese stocks too cheap to ignore by JPMorgan Asset and Invesco

(Bloomberg) — The bear tide against Chinese equities is intensifying, but for some fund managers, equities are getting their money’s worth.

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JPMorgan Asset Management is adding more Chinese stocks to its portfolio betting that cheap market valuation and government support for the economy will support returns. Invesco Asset Management Ltd. is overweight equities and favors big tech names such as Alibaba Group Holding Ltd. and Tencent Holdings Ltd.

Optimism shows that some market veterans are betting on a recovery even as Wall Street banks from Morgan Stanley to Goldman Sachs Group Inc. cut their forecasts for major Chinese stock indexes. Hopes are growing that policymakers will provide more stimulus to support growth, after authorities asked the country’s biggest banks to lower deposit rates.

Looking at “where valuations are today, it’s probably good to go a bit overweight,” Ayaz Ebrahim, JPMorgan’s emerging markets and Asia-Pacific equity portfolio manager, said in an interview. at Bloomberg TV. “From a more neutral position, we have added again.”

Geopolitical risks and a disappointing economic recovery have turned Chinese equity indicators into global underperformers, with the MSCI China and Hang Seng China Enterprises indices both falling into bear markets in recent weeks.

While pessimism remains dominant, some foresee a trough. Authorities have reportedly asked the country’s biggest banks to cut deposit rates for at least the second time in less than a year, marking an escalation in efforts to boost the world’s second-largest economy. The government is also considering a new home ownership support scheme, according to an earlier report.

Ebrahim pointed out that the market is cheap, as the government has taken steps to improve business and consumer confidence. On earnings-based valuations, the HSCEI index is trading below its five-year average and at a 6% discount to its projected one-year book value, according to data compiled by Bloomberg.

Although there has been some lag in the economic recovery, the market “looks at 18% to 19% earnings this year and around 15% to 16% next year and is cheap,” Ebrahim said. “It’s basically trading low, close to the pound, and earnings are still rolling in.”

For Invesco, Chinese companies offer “pretty good value and earnings in some areas,” with companies such as Alibaba and Tencent focusing on shareholder return, said Tony Roberts, who manages the Invesco Pacific fund ( United Kingdom).

‘Too cheap’

The Invesco fund has been overweight Chinese stocks since January 2022, with the position mirroring its position in Chinese and Hong Kong stocks, according to Roberts. The vehicle has increased its holdings in Alibaba this year as stocks have weakened, and the shares make up about 2.3% of its total holdings, he said.

“You just have a general discount because US-China tensions are very high right now, so I think that gives us an opportunity in China as well,” Roberts said in an interview. Big Chinese tech companies such as Alibaba and Tencent are “simply too cheap”.

The Invesco fund has returned 8.9% over the past three years to beat 93% of its peers, according to data compiled by Bloomberg. He had £240.7 million ($299 million) in assets at the end of April, according to his fact sheet.

JPMorgan Asset, according to Ebrahim, was overweight China after lows in the third quarter of last year and then saw profits turn neutral as economic indicators continued to disappoint.

Ebrahim is bullish on Chinese consumption, although recent data shows the recovery has weakened. Manufacturing activity contracted again in May, while house price growth slowed after a recovery earlier in the year. In the latest sign of economic sluggishness, Chinese exports fell for the first time in three months in May.

He added that his company was looking at the actions of component makers and those related to national spending. He prefers small stocks to large corporations.

–With help from Shen Hong, Yvonne Man and David Ingles.

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