Rout of China and Hong Kong equities presents buying opportunities, experts say

An investor checks prices at a brokerage house in Anhui province. China’s benchmark index plunged 8.4 per cent on Monday, the biggest single-day loss in eight years. An Ming / EPA

HONG KONG // The sell-off of Chinese equities yesterday was met with little concern in Hong Kong, where the retail boutiques were still bustling with visitors from mainland China looking to spend.

Economists and investors also remained sanguine even though the Shanghai Composite Index fell 8.49 per cent yesterday to 3,209.91 – its biggest one-day rout in eight years.

Shuang Ding, Standard Chartered’s chief China economist, said although the sell-off had been steep, it was to be expected.

He said that previous market valuations seemed to be based purely on an expectation that the Chinese government would step in to support China’s economy if the Shanghai Composite Index fell below 3,500 points.

The fact that this had not happened was the main reason behind the market plunge, he said.

He estimated that the floor for the index was probably between 3,000 and 4,000 points.

“We are heading towards the bottom end of this,” he said.

Niklas Hageback, a partner at fund manager Valkyria Kapital, echoed this view, saying that the popular perception was that the Chinese government would “implement some Bernanke-style stop” on market falls as the Shanghai index drops to 4,000 points and then 3,500 points. He was referring to Ben Bernanke, the former chairman of the US Federal Reserve.

“But it [the index] has crashed through that [the 3,500-point level],” said Mr Hageback, adding that calling the bottom of China’s market decline was more difficult than elsewhere around the world. “It’s a policy-driven market and you can’t deploy the traditional tools that investors rely on for valuing equities,” he said.

“You need to be more of a political scientist, than an economist or an analyst, to understand it.”

But buying opportunities would open up were Hong Kong’s Hang Seng Index to fall 8 per cent today, following its 5.17 per cent decline yesterday, Mr Hageback said.

He pointed to a one-day decline on July 8 when the market “was so oversold it was obvious”. During this period, a number of companies were trading at values that were lower than their cash assets, Mr Hageback said.

“Even in a ‘falling knife’ type of market there are opportunities. We see ourselves buying again in the next couple of days if this continues,” he said. “When you look at the fundamentals, a lot of the companies have healthy balance sheets and carry relatively little debt. If you are a long-term investor and can keep your cool, there are some real opportunities.”

Mark Haefele, the global chief investment officer of UBS Wealth Management, said the sell-off had been sparked by weaker manufacturing data that emerged from China last week. But that and a weaker reading of a purchasing managers’ index survey in the United States were “not bad enough to change our fundamental outlook for global growth”, he said.

“The manufacturing side of the Chinese economy has been struggling for some time and the construction sector has been hit by oversupply and soft demand. We are not expecting conditions to worsen in China. Rather, we believe that momentum will gradually pick up towards year-end as accumulated easing measures begin to take effect. That said, China has the capacity and willingness to enact more policy measures.”

Dr Lo Ka Shui, the chairman and managing director of Great Eagle Holdings and the chairman of Langham Hospitality Investments, believes that the Chinese government could intervene if the market turmoil worsens.

Last week’s manufacturing data “did give an indication that the Chinese economy isn’t doing that well”, he said. “Having said that, even if [growth] drops to 5 or 6 per cent, it is still a very high level compared to the rest of the world,” said Dr Lo. “Mainland China has a huge amount, US$4 trillion, of reserves. With that amount of money, you are able to buffer a lot of shocks.”

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