Global Stock Fund Exits From China, Showing Bargains Are Hard to Find

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Pedestrians walk past an electronic display showing the Hang Seng Index figure in Hong Kong, China.

Photographer: Jerome Favre/Bloomberg

Years investing in China’s stock market have taught Garry Laurence that extreme volatility creates opportunities. Lately, he says, they’ve all been opportunities to sell.

The Sydney-based money manager, who helps oversee about $25 billion at Perpetual Ltd., has been unloading all the yuan-denominated A shares in his global equity fund over the past two months. He says Chinese stocks are more attractive in New York and in Hong Kong, where the average dual-listed company trades at half its price on the mainland.

“We decided to sell out,” Laurence, whose Perpetual Global Share Fund gained 29 percent in the year through May, in line with its benchmark index, said by phone on Monday. “We were finding much better value in Hong Kong.”

Even after a 24 percent drop in the Shanghai Composite Index from its June peak, the median price-to-earnings ratio on mainland bourses is higher than in any of the world’s 10 largest markets. Concern that valuations are still too expensive has helped fuel a record stretch of foreign outflows through the Shanghai-Hong Kong exchange link over the past seven days.

The Shanghai Composite fell 3 percent at the close on Wednesday, while the Hang Seng China Enterprises Index of mainland shares traded in Hong Kong dropped 1.3 percent.

Laurence cashed in all his shares of Kweichow Moutai Co., the maker of a fiery liquor favored by Chinese officials, after valuations almost doubled in less than 12 months. He also sold Wuliangye Yibin Co., another liquor maker, and Ping An Insurance Group Co. He bought Shinhan Financial Group Co., South Korea’s biggest bank, and added European shares amid a retreat in June.

Too Expensive

As Chinese equities lost almost $4 trillion of value through July 8, policy makers took unprecedented measures to prop up the market. They banned large shareholders from selling stakes, ordered state-run institutions to buy equities, allowed the central bank to finance stock purchases and let more than half of companies on mainland exchanges halt trading.

The result was a 13 percent rebound in the three days ended July 13, along with warnings from BlackRock Inc., UBS Group AG and Templeton Emerging Markets Group that mainland stocks need to fall further before they’re worth buying.

“We have been in more recent times focusing on the H share market because there have been better valuation opportunities,” Chris Hall, co-head of Asian equity research at BlackRock, the world’s largest money manager, said at a briefing in Hong Kong on Tuesday.

H shares, as the Hong Kong-listed securities of mainland companies are known, trade at an average 52 percent discount to their counterparts in Shanghai and Shenzhen, data compiled by Bloomberg show.

Sell Rebound

Investors should take advantage of any rebound to sell mainland equities, Willie Chan, an analyst at Maybank Kim Eng Holdings Ltd., wrote in a July 13 note. Foreigners have heeded that call, offloading 44.2 billion yuan ($7.1 billion) of shares through the Hong Kong exchange link over the past seven days.

Outside the mainland, Perpetual’s Laurence favors the New York-listed shares of Zhaopin Ltd., an internet company that has a forward price-to-earnings ratio 64 percent cheaper than that of the CSI 300 Information Technology Index. He also likes the Hong Kong shares of China Life Insurance Co., which trade at a 24 percent discount to the company’s mainland securities.

“We had been holding A shares for quite a number of years when we felt they were highly undervalued,” Laurence said. “Then they re-rated and the stocks that we owned got to fair value.”

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