No Near-Term Upside for Chinese Stocks, Says Lygh Hedge Fund

  • IPO reform will increase stock supply, Lygh Capital Says
  • GH China Century Fund Returned 18.2% YTD until end November

China’s stock market won’t see much upside during the first half of next year as the nation’s reforms of initial public offerings will spur a new supply of shares, and earnings growth will remain subdued, according to Singapore-base fund manager Lygh Capital Pte.

“I am cautious about this new supply coming to the market,” Grace Lu, managing director at Lygh and portfolio manager of the GH China Century Fund, said in an interview. “Stock markets will go sideways at best over the first half,” said Lu, who previously worked at a unit of Singapore’s state-owned investment firm Temasek Holdings Pte.

Lygh’s fund, which has more than 50 percent of its assets in cash, is treading carefully as more companies are expected to be listed in China after authorities have pledged to switch from an approval-based system of initial public offerings to a registration-based framework. The rising supply comes as investors have been burned by a rout in the markets this year. The Shanghai Composite Index slumped as much as 43 percent between mid-June and the end of August, before rebounding amid government stimulus.

Beating Benchmarks

The long-short equity GH China Century Fund advanced 18.2 percent since the beginning of the year through November, Lu said, almost triple the gain in the benchmark Shanghai Composite during that period. The fund, which has more than $70 million of assets, according to Lu, has returned 61 percent since its inception in January 2014.

Under China’s current approval-based IPO system, regulators can control both the timing and pricing of deals. Under the new regime, like in the U.S., authorities are expected to focus primarily on enforcing disclosure requirements, without any interference in the timing or valuation.

The Shanghai Composite dropped 0.6 percent at the close to its lowest level since Nov. 3.

Before starting the GH China Century Fund, Lu worked from 2006 until 2013 at Fullerton Fund Management Co., a unit of Temasek.

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