Funds sell China stocks for lowest position in 11 months

A record sell-off in Chinese stocks by global funds has pushed their positioning to the lowest since October, with money managers unswayed by the stimulus measures that have been coming through over the past few weeks. 

The average underweight position by global long-only managers is back to where it was before the reopening rally took off in late 2022, according to a Morgan Stanley quant analysis. Foreign funds sold about 90 billion yuan ($12 billion) of mainland shares in August via the trading links with Hong Kong, the most in data compiled by Bloomberg going back to 2016. 

Global funds were again in retreat Tuesday as a private survey showed China’s services sector cooling. That cut short a pickup in buying seen Monday, when the latest easing of mortgage rules aided sentiment. The Hang Seng China Enterprises Index slid as much as 2.2%, giving back some of its 3.2% gain in the previous session.  

“Our latest positioning data shows that underweight China is a consensus among regional funds,” Morgan Stanley strategists led by Gilbert Wong wrote in a Sept. 4 note. “Net outflows from active long-only managers on China/HK equities doubled in August versus that in July.” 

The recent volatility in Chinese equities underscores fragile sentiment. While Beijing’s stimulus drive has helped contain a rout, fundamental worries over the slowing economy and debt problems at developers are casting a pall over the longer-term outlook. 

Yet for some money managers such as Luca Castoldi, the slump is an opportunity to build positions.  

With the government following through its pledges to shore up the economy, “we are feeling confident in starting to add exposure to China,” particularly in technology and consumer discretionary shares, said Castoldi, a fund manager at Reyl Group in Singapore. 

Beijing’s efforts to boost housing sales by lowering downpayments and loosening mortgage restrictions “is even better than our expectations,” and shows “the government is there to support the economy and will be ready to do even more if needed,” he said Friday. 

‘AMAZING OPPORTUNITY’

Castoldi’s view is shared by Damian Bird, a manager of Polen Capital’s emerging-markets growth portfolio in London.   

“People aren’t giving credit for things that ultimately we think matter,” he said. “That’s why I think right now, there is amazing opportunity to go into the market” for stocks that are less sensitive to newsflow but can deliver steady capital returns for the next five years, Bird said last week.  

Some bright spots are also emerging. Earnings estimates for tech stocks have been trending upward since a March low, even as those for the broader benchmarks have remained largely unchanged.    

For Fredrik Bjelland, who manages the emerging-market equity fund at Skagen AS, the strategy of investing in Chinese stocks remain unchanged — focusing on corporate fundamentals and finding companies that can withstand macro challenges. 

“Regardless of what happens, there will be winners,” he said earlier this week. “In a crisis when things fall very rapidly, the correlation is very high. So everything falls more or less the same. The money is made by trying to catch the ones that will rebound again.” 

Bjelland counts on Ping An Insurance Group Co. and oil firm Cnooc Ltd. as the top two holdings in his emerging-markets portfolio. After exiting three Chinese stocks this year — Foxconn Industrial Internet Co., Hisense Home Appliances Group Co. and China Life Insurance Co. — he is considering investments in developers and property management companies in search for potential survivors of the industry slump.