Star Hedge Fund Calls China Stocks Bottom, Says Time to Buy

(Bloomberg) — A top-performing Chinese macro hedge fund said the nation’s stocks rout has run its course, predicting a bull market is around the corner.

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Shanghai Banxia Investment Management Center, which manages more than 10 billion yuan（$1.4 billion), has rebuilt net-long positions in the mainland-traded A-share market to 40% as of the end of last month, according to its September investor letter seen by Bloomberg. The firm had kept equities low since June before adding exposure late last month.

“Standing at this point in time, we’re no longer pessimistic on A-shares,” the company, led by founder Li Bei, wrote in the letter dated Oct. 10. “We’re facing a very good opportunity to gradually buy the dip and long A-shares.”

Li, who held zero stock exposure earlier this year, is adding to growing optimism among peers as the government steps up efforts to bolster growth and arrest a property crisis. About 78% of hedge funds say stocks have fully priced in all negative factors and the benchmark Shanghai Composite Index has bottomed out at around 3,000, a key level breached earlier this week, according to a survey by Shenzhen PaiPaiWang Investment & Management Co.

Corporate profits probably hit a low in the third quarter, property sales could rebound as soon as next month as regional policies become clear, and covid restrictions could somehow ease after the Communist Party Congress this month, according to Banxia. Those factors should offset a weakening in exports, suggesting China’s economic growth could rebound after October.

Banxia’s optimism has grown from May, when Li built long positions to as much as 65% before cutting back. The company’s Banxia Stable Fund topped rankings in 2020 with a 258% surge.

Li declined to comment on the letter. Her lower-volatility Banxia Macro Fund lost 3% this year through Sept. 30, trimming gains since inception in 2017 to 225%, according to the document. The CSI 300 Index fell 23% in the first nine months.

The market correction could have been “overdone,” said Guan Huayu, another manager whose newly-established United Advance Capital Company Ltd. raised more than 10 billion yuan in just three months, one of the fastest fundraising campaigns by a hedge fund, according to PaiPaiWang.

While the stock indexes are very close to lows seen in late April, the economy, market environment and policy support now are “noticeably better,” Guan wrote in the company’s September letter to investors.

United Advance’s current holdings mainly consist of new energy, high-end equipment and technology innovation bellwether firms. Its team has also “locked in a batch of” stocks at valuation levels that have strong prospects, according to the letter seen by Bloomberg. The company declined to comment.

Banxia’s bullish outlook is also shared by Shanghai Yunhan Asset Management Co., another macro fund that started buying stocks in sectors such as oil, shipping and medical equipment last month after cutting equities to zero at the end of June to pocket gains. The firm manages about 400 million yuan, with its flagship fund jumping 65% this year through Sept. 30. It also provides advisory to 5 billion yuan worth of bank clients’ bond portfolios.

The property market, which has been a big drag on growth, is set to see marginal improvements as local authorities step up support, Yunhan’s President Zhang Wenchao said. China’s policy of conducting routine covid tests, once enforced effectively, is able to keep the virus in check without resorting to massive lockdowns like in Shanghai, he said.

“Even in a worst-case scenario, a weak economic recovery is certain,” Zhang said by phone from Shanghai. “If there’s a major policy shift, say the covid curbs are loosened significantly, we could even see a V-shaped rebound” in the market.

Not everybody is optimistic, though, with the official People’s Daily reiterating the importance of maintaining Covid Zero, and property sales still falling. In the PaiPaiWang survey, only 21% of funds said a rebound is coming while nearly 65% of respondents said the market will keep fluctuating.

Banxia also struck a note of caution for the near term. A further 10% decline is still possible, and the company is mainly using derivatives to increase exposure while capping net-long positions at 60%. It will only add stocks directly when a rebound takes shape, according to the letter.

The company chose not to short stocks “because we knew this was the final round of declines,” according to the letter. “A new bull market will follow.”

(Updates with United Advance’s view from eighth paragraph)