Photographer: Justin Chin/Bloomberg

Short Seller Carnes Seeks Targets as Hong Kong Stocks Rally

  • Carnes looking at smaller Chinese industrial companies
  • Mainland buying has spurred gains in city’s equities

A world-beating rally by Hong Kong stocks is attracting at least one notable short seller.

Jon Carnes, who built his career betting against Chinese companies, is looking to target smaller mainland industrial companies traded in the city. The Hang Seng China Enterprises Index has jumped 8.1 percent in the past month, the most among global gauges tracked by Bloomberg and sending a momentum indicator to the highest level since April 2015.

Jon Carnes
Jon Carnes
Source: Jon Carnes via Bloomberg

“With strong recovery in Hong Kong stocks there are some interesting short opportunities," said Vancouver-based Carnes, who declined to comment on specific stocks. “I expect some good short opportunities in the next few months."

Hong Kong equities have surged amid a buying spree by mainland investors seeking cheaper alternatives to their moribund stock market and a hedge against a weakening yuan. Net purchases through an exchange link with Shanghai jumped to 6.1 billion yuan ($913 million) on Friday, the most since April 2015.

China National Building Material Co., Anhui Conch Cement Co. and GCL-Poly Energy Holdings Ltd. are among stocks traded in Hong Kong that have the highest short interest at more than 10 percent of shares outstanding, according to data compiled by IHS Markit Ltd. and Bloomberg. The Hang Seng Index slumped 3.4 percent on Monday.

Carnes, who started his investment career in 1992, has been researching Chinese shares for at least a decade. Around 2009, he started focusing on short-sale opportunities in companies he suspected were inflating their financial statements. To shield against authorities who frowned on negative publicity for Chinese firms, Carnes created a fake online identity -- Alfred Little -- that he used to broadcast his views.

Carnes is bullish about the prospects for the Shanghai Composite Index, which he says will climb to a record high by the end of next year. He made a similar prediction in July last year, seeing the index more than doubling by the end of 2016. That forecast hasn’t panned out -- the gauge is more than 10 percent below the level when he made it -- because the economy weakened more than he expected and MSCI Inc. held off adding the nation’s shares to global benchmarks, Carnes said.

Property Shift

Capital that flowed into the nation’s soaring property market will eventually move into stocks, he said.

"The switch from real estate investment to equity investment will probably be driven by the improving economy - eventually there will be realization that the real estate is overpriced, overvalued and equities are a lot cheaper," Carnes said. "I continue to expect the markets to go higher."

Even after the rallying, Hong Kong-traded stocks are cheap relative to global gauges. The Hang Seng China Enterprises Index trades at 8.2 times estimated earnings, less than the MSCI All-Country World Index’s 15.8 multiple, according to data compiled by Bloomberg. The Hong Kong measure is still 32 percent below last year’s peak.

“The market has rebounded a bit but it has come up from a very low point," said Norman Chan, Hong Kong-based chief investment officer at a private wealth division of Oreana Financial Services Ltd. “Current valuation is still reasonable. On individual stock by stock basis, there are small-cap stocks that are being targeted."

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