China H-Share Bulls Unbowed After Stocks Drop Most Since 2011

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They might have been hard to spot Wednesday, but Chinese stocks in Hong Kong do have some fans.

Fund managers from LGT Group and AMP Capital Investors, which oversee a combined $255 billion, said the steepest drop since 2011 is a buying opportunity as authorities stand ready with steps to boost the mainland’s economy. As the Hang Seng China Enterprises Index slid 6.1 percent, strategists at HSBC Holdings Plc said the worst may be over for Chinese equities and reiterated a preference for Hong Kong stocks. The H-share gauge rebounded Thursday, heading for its biggest jump since April.

China’s equity rout deepened this week, spreading across Asia and to the U.S., as another round of government support measures failed to allay concern that margin trades will keep unwinding at a record pace. Only one stock on the 40-member Hang Seng China Enterprises Index in Hong Kong rose Wednesday, as the gauge extended losses to 25 percent from a high reached in May. The measure fell to the lowest multiple relative to global equities since November.

“Sentiment has gone from optimism to extreme pessimism now,” said Nader Naeimi, Sydney-based fund manager at AMP Capital, which oversees A$160.5 billion ($118 billion). “Valuations are much more attractive,” he said, adding that he increased his allocation to H-shares on Tuesday.

Panic selling in mainland markets spilled over into Hong Kong, which never shared the joy Chinese shares had on the way up. The Shanghai Composite Index soared 76 percent in the six months through its June high, as the H-share gauge added 24 percent. They tracked more closely on the way down, with the Hong Kong measure sliding 21 percent from June 12 through Wednesday as shares in Shanghai dropped 32 percent.

‘Better Value’

The H-share index staged a rebound Thursday, climbing 4.3 percent as of 10:15 a.m. in Hong Kong. The city’s benchmark Hang Seng Index added 4.4 percent and the Shanghai Composite rose 2.5 percent, erasing a 3.8 percent slide.

Goldman Sachs Group Inc. and HSBC are staying bullish. Kinger Lau, Goldman’s China strategist in Hong Kong, predicted the mainland CSI 300 Index will rally 27 percent from Tuesday’s close over the next 12 months as government support measures boost investor confidence and monetary easing spurs economic growth. HSBC has a year-end target of 14,000 on the Hong Kong H-share gauge, implying a 26 percent advance from yesterday’s close.

“As Hong Kong stocks are trading at a large discount to their A-share peers, we believe the liquidity spillover will naturally flow to Hong Kong looking for better value,” HSBC strategists including Hong Kong-based Roger Xie, wrote Wednesday in a report.

Relative Value

The Hang Seng China Enterprises Index traded Wednesday at

1.1 times the value of its constituents’ net assets, the lowest since November. That compared with a multiple of 2.1 in Shanghai, which is in line with the global average. Dual-listed shares cost 48 percent more on the mainland than in Hong Kong, according to a gauge tracking price differences.

“We’re still positive on H shares as they are getting cheaper,” said Stephen Corry, Hong Kong-based chief investment strategist at the private-bank unit of LGT Group. “We are not sure why investors would wish to take on additional risk by entering the A share market when you can pick up an undervalued equity in the H shares, which is a more liquid market, trading on more reasonable valuation metrics.”

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