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Shanghai shock: four top managers on China’s market pull-back

Shanghai shock: four top managers on China’s market pull-back

The pronounced sell-off in Chinese equity markets has raised fears of the so-called ‘hard landing’ finally coming to pass, with stocks experiencing their worst week since the 2008 financial crisis.

With the sell-off extending further on Tuesday 23 June, investors are considering whether this is a healthy pull-back following a period that saw Shanghai shares double over the past 12 months, or something more severe.

Citywire Global has collated the views of leading investors focused on both Chinese and emerging market equities to uncover whether this latest development signals the bursting of the bubble or merely a blip.

Retail investors running scared

David Raper, Citywire A-rated manager of the Comgest Growth Greater China fund, said in a market commentary that aspects of the Chinese story are overvalued, but hidden pockets of opportunity remain.

So far the market rally in China has been strongly driven by retail investors. Due to this, some segments of the market look overheated. For example, ChiNEXT, an index for fast growing and tech stocks, trades at a 2015 PE of more than 70x.

Ironically, for the inverse reason, the less loved names by the retail investors, namely the more stable growth and 'boring' companies, offer compelling valuation levels for the long term.

Finally, the cost of investing in China A-shares has fallen dramatically over recent quarters. This has further encouraged liquidity and competition amongst brokers has increased.

We have increased our exposure to China A-shares over past years, which now make up approximately 20% of our Comgest Growth Greater China fund, significantly ahead of our peers.

A-shares impact cannot be overstated

Echoing Raper, Khiem Do, head of Asian multi-asset at Barings, believes the latest developments need to be viewed in the light of major advancements in the performance of the A-shares market.

What we saw recently in the A-share market can be deemed as a correction in a massive bull run, rather than the start of a big bear market. A number of reasons were provided to explain the 15% correction in the A-share market over the past six trading days.

Firstly, local investors had to sell existing shares to raise money for a large amount of new IPOs, which locked up billions of US dollars equivalent. Secondly, there were warnings by the authorities over margin lending activities, and finally some parts of the A-share markets became overbought.

This was especially true in the internet and technology stocks listed on the ChiNEXT exchange. Basically, the authorities wish to see a steady bull market, not a runaway one.

Mainland market driving overheating

According to Thomas de Saint-Seine, Citywire + rated manager at RAM Active Investments, the recent fallout can be pinned squarely on A-shares and further pain could be in the pipeline.

It was probably just a pullback following the decision of MSCI not to include A-shares in the MSCI EM at the current stage. Investors were speculating on that. We are still considering the current valuation of A-shares as extremely expensive and not fundamentally justified.

The Chinese market is very flow driven, therefore the bursting could be violent. We stay away from that speculative exposure on all of our emerging market equity funds.

IPO appetite causing turbulence

Citywire A-rated Giovanni Buffa of AcomeA doesn’t see a risk of a bubble in the Chinese market for the moment, but he believes increased IPO activity has raised volatility.

We see high volatility, but you have to consider that today Shanghai closed at +2.2%, with a max loss of -4%, thanks to the good performance of some financial and insurance stocks. People are buying new stocks and selling the old ones, and this could have fuelled some movements.

In general we expect the market to remain very volatile: it's a little bit high but, in our opinion, there's no sign of a bubble. Shanghai has more or less the same valuations of the Indian stock market, and nobody is speaking of a bubble in the Indian market.

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