China’s star fund managers ask investors to keep the faith, saying Asia’s worst-performing bourse in the first quarter has bottomed out

• Zhang Kun and Liu Yanchun joined China International Capital Corp and Huaxi Securities in calling a bottom on Chinese stocks last month
• The Shanghai Composite Index ended the first quarter 11 per cent lower, the worst in Asia

China’s star fund managers expect the world’s second-largest stock market to resume its upward climb, brushing aside headwinds from the unprecedented Shanghai lockdown to the Ukraine-Russia war that made it Asia’s worst-performing benchmark in the first quarter.

Zhang Kun, who oversees US$16.1 billion of assets for E Fund Management, the most in China, has advised investors to focus on corporate fundamentals and metrics to value stocks rather than macroeconomic factors.

The fund manager increased holdings of Tencent Holdings and surveillance camera maker Hangzhou Hikvision Digital Technology in the fourth quarter, according to Bloomberg data.

Liu Yanchun, who manages US$15.5 billion at Invesco Great Wall Fund Management, also struck an optimistic tone, arguing that a swing in the economic cycle was unlikely to affect stocks’ intrinsic value and that China’s policy support would soon lift sentiment across many industries.

The upbeat views by China’s elite money managers may be an indication that the worst for the nation’s US$11.3 trillion stock market is over, after it ended the first quarter as the worst performer in Asia. Amid a flare-up in coronavirus cases in China, the worst since the pandemic started two years ago, fears of rapid rate increases in the US to curb runaway inflation and the Russia-Ukraine war spurred sell-offs over the past three months, top officials from Beijing have pledged to shore up equities and economic growth.

Zhang and Liu joined China International Capital Corp and Huaxi Securities in calling a bottom on Chinese stocks last month. Their comments may help to restore confidence in the beleaguered stock market, given top fund managers’ influence on mom-and-pop traders who closely follow their calls and money actions.

“Expanding credit, stabilising growth and boosting domestic demand are expected to be the key policies this year, given China’s growth is already below its potential growth rate,” said Liu in one of his fund’s annual reports last week. “With the counter-cycle policies in place, the downward cycle is expected to end and be reversed. A short-term fluctuation in the economic cycle typically affects investors’ risk appetite rather than companies’ intrinsic values.”

The implications of the ongoing lockdown in Shanghai, China’s financial hub, were immediately apparent, with an official manufacturing purchasing managers’ index contracting for the first time in five months in March, bolstering the case for Beijing to further loosen policies to hold in check a further moderation in growth, according to Swiss private bank UBP and Invesco.

China’s central bank will soon resume a cut in borrowing costs and probably lower the reserve requirement ratio this quarter, said UBP.

The Shanghai Composite Index, after ending the first quarter 11 per cent lower, rose 0.9 per cent higher on Friday. The tumult caused mayhem in China’s asset-management industry. Some 95 per cent of the 1,057 stock funds have posted losses this year, with the few winners limited to the index funds tracking commodity stocks that benefit from global inflation, according to Bloomberg data.

Zhang and Liu’s funds were not spared either. Zhang’s flagship E Fund Blue Chip Selected Mixed Fund lost 18 per cent in value this year, and Liu’s Inveso Great Wall Growth Equity Fund slumped 21 per cent.

Zhang’s major portfolio adjustment saw him adding 1.3 million Tencent shares and 3 million of Hikvision in the fourth quarter, while Liu bought an additional 1 million shares of China Tourism Group Duty Free. They both cut the positions in liquor producers Kweichow Moutai and Wuliange Yibin in the span.

Zhang sticks to free cash flow, a measure of a company’s ability to pay dividend, debt and interest, as the main methodology for selecting stocks, because the metric can reflect whether profits can be successfully translated into cash and show how solid a company’s business model is, according to the his fund’s annual report.

The yardstick has enabled him to keep Tencent as the biggest holding in his fund, even though the WeChat operator has lost 17 per cent in value this year amid soured sentiment in the broader tech sector. The Chinese social-media giant had accumulated US$26.4 billion in cash at the end of last year, the most on record, according to Bloomberg data.

The market bottom will take time to take hold, based on earlier precedence, according to Huaxi Securities, pointing out that the last time Vice-Premier Liu He talked up stocks in October 2019 at the height of the US-China trade war, the Shanghai Composite did not bottom out until almost three months later.

“We still believe the Chinese economy will reaccelerate in the back half of 2022,” said David Chao, a strategist at Invesco in Hong Kong. “It’s likely that further easing measures and encouraging words from authorities could lead to a rebound in credit growth over the next few quarters.”

Author: Zhang Shidong, SCMP