China Bears' Long March

Investors are so familiar with losses that they risk missing the bigger picture.

Managers of funds invested in China and Hong Kong often complain about the way troubles in their backyard are exaggerated. Leave the full verdict to history, but there are signs that the current bearishness may be overdone.

Investors pulled a net $142 million from the iShares MSCI Hong Kong ETF in May, setting it up for an 11th straight month of net outflows, the longest string on record, Bloomberg News reported Wednesday. While the underlying stock index has fallen 2.2 percent this month, investors were net sellers even in March, when the gauge staged its biggest rally in four years.

Another ETF that follows stocks traded in Shanghai and Shenzhen, the Hong Kong-traded Deutsche X-Trackers UCITS CSI 300, hasn't ended a month above its net asset value since November 2013.

So Negative

The premium to net asset value on the Deutsche X-Trackers UCITS CSI 300 China A-Shares has been negative over the past 30 months

Source: Bloomberg

The fund's New York-traded sister, the Deutsche X-Trackers Harvest CSI 300, is flagging a similar trend, having endured $584.5 million in redemptions since June 2015. 

Run for the Hills

Since June, investors have withdrawn $584.5 million from New York-listed Deutsche X-Trackers Harvest CSI 300 China A-Shares

Source: Bloomberg

The aversion seems particularly strong outside the region. According to data compiled by Bloomberg, 53 funds domiciled outside Asia with more than 90 percent of their money invested either in Hong Kong or China saw their assets under management drop 9.5 percent because of outflows this year. The worst hit was the iShares MSCI Hong Kong ETF

Meanwhile, Hong Kong's benchmark Hang Seng Index sports the lowest trailing price-earnings ratio among major indexes in Asia, at 10 times. The CSI 300 index in China is at 13.3 times, right around its five-year average, which is another way of saying the benchmark is hardly overvalued. Hong Kong's dividend yield is also among the highest in the East.

China's economic data have been better than predicted after the government reopened the credit spigots, with the latest positive surprise coming in the form of a lower-than-expected drop in producer prices. All this should underpin stocks both in Hong Kong and on the mainland.

Much of the bearishness, therefore, may be due to perception. After being burned in the past year, investors may be seeing risks through a magnifying glass. In a paper published in 2000, Craig R. Fox and Jonathan Levav argued that people tend to place more weight on arguments in favor of their preset opinions. They also said familiar events carry more weight in decision-making. 

Well, the CSI 300 is down 34.1 percent in the past year, while the Hang Seng has lost 27.6 percent. So for investors, the notion of losing money in these markets is more familiar than the alternative. Some of the best money managers, however, profit when they realize most of the pain is in the past, even as others flee.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

    To contact the author of this story:
    Christopher Langner in Singapore at

    To contact the editor responsible for this story:
    Paul Sillitoe at

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