For JPMorgan Asset and Invesco, Chinese equities are too cheap to ignore

(Bloomberg) – The downtrend against Chinese stocks is increasing, but for some money managers the stocks are good value.

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JPMorgan Asset Management is adding more Chinese stocks to its portfolio, betting that cheap market valuations and government support for the economy will boost returns. Invesco Asset Management Ltd. is overweight the stocks and favors top tech names like Alibaba Group Holding Ltd. and Tencent Holdings Ltd.

The optimism shows some market veterans are betting on a rebound, although Wall Street banks from Morgan Stanley to Goldman Sachs Group Inc. have lowered their forecasts for major Chinese stock indexes. After authorities urged the country's largest banks to cut deposit rates, there are growing hopes that policymakers will provide further stimulus to boost growth.

Given “where valuations are today, it's probably good to be a little overweight,” Ayaz Ebrahim, JPMorgan's portfolio manager for emerging markets and Asia Pacific equities, said in a Bloomberg TV interview. “We added again from a more neutral position.”

Geopolitical risks and a disappointing economic recovery have caused Chinese equity indicators to become underperformers globally, with both the MSCI China and Hang Seng China Enterprises indices ending up in bear markets in recent weeks.

While pessimism continues to prevail, some are feeling a bottom. Authorities have reportedly asked the country's largest banks to cut their deposit rates for at least the second time in less than a year, in a stepped-up attempt to boost the world's second-largest economy. According to an earlier report, the government is also considering a new property promotion package.

Ebrahim stressed that the market is cost-effective as the government has taken steps to boost business and consumer confidence. At earnings-based valuations, the HSCEI index is trading below its five-year average and is at a 6% discount to its one-year projected book value, according to data compiled by Bloomberg.

While there has been some lag in the economic recovery, the market “expects gains of 18-19% this year and about 15-16% next year and is cheap,” Ebrahim said. “Basically, this is a bottom, close to book value, and the gains are still coming.”

For Invesco, Chinese firms offer “pretty good value in some areas and good earnings,” with companies like Alibaba and Tencent focusing on providing returns for shareholders, said Tony Roberts, who manages the Invesco Pacific Fund (UK). managed.

‘Too cheap'

According to Roberts, the Invesco fund has been overweight Chinese stocks since January 2022, with the stance reflecting its position in both Chinese and Hong Kong stocks. The vehicle increased its holdings in Alibaba this year as shares faltered, and the stock accounts for around 2.3% of its total holdings, he said.

“They only have a general discount because tensions between the US and China are very high at the moment. I think that gives us an opportunity in China as well,” Roberts said in an interview. China's big technology companies like Alibaba and Tencent are “simply too cheap”.

According to data compiled by Bloomberg, the Invesco fund has returned 8.9% over the past three years, outperforming 93% of its peers. The fact sheet showed the company was worth £240.7 million ($299 million) at the end of April.

According to Ebrahim, JPMorgan Asset went overweight China after the lows in the third quarter of last year and then posted some gains only to turn neutral as economic indicators continued to disappoint.

Ebrahim is optimistic about Chinese consumption, although recent data shows the recovery has weakened. Manufacturing activity fell again in May, while house price inflation slowed after rising earlier in the year. In the latest sign of economic weakness, China's exports fell in May for the first time in three months.

He added that his company keeps tabs on stocks of component manufacturers and those tied to domestic spending. He prefers smaller stocks to larger peers.

– With support from Shen Hong, Yvonne Man and David Ingles.

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