HEdge fund managers on a chinese stock buying spree

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It seems that foreign investors and hedge fund managers in particular are buying into the 2013 China recovery story following our lead here. In recent months they have started rebuilding their Chinese equity portfolios. Historically low valuations and two years of market underperformance couple with renewed signs of economic growth are prompting the cheque books to be opend

In the last two months, foreign investors have pumped almost $4 billion into Chinese equities hoping to catch the sustained rally early. So far, a little too early but there is a saying in the markets – “you’ve got be wrong to be right”. The hedge funds no doubt have begun to arrive early in the expectation of not missing out on an explosive rally that generally typify bear market ends.

With China still promising faster growth than the rest of the world, valuations are attractive and fears of a major slowdown seem to be waning. The shift in foreign investor attitudes is clear, a recent global survey of fund managers found confidence in China’s economy was at a three year high.

Valuations are the main attraction here, the MSCI China index trades on forward price-to-earnings multiple of 9.2, cheaper than Brazil on 9.9 and India on 13.2. A lure to investors hoping to get in early on another substantial upswing. Remember, nobody ever rings a bell at the bottom (or top) – it is valuations and nerve that get you in at the nottom, and invariably through taking a contrarian stance.

As Beijing’s new leadership settles in, the stock market’s fundamentals are back in focus and they could make the recent enthusiasm seem premature.  Five years back in 2007 the Chinese market was one of the most expensive and now it’s one of the cheapest, on par with Korea.

And if Hong Kong is now a proxy for mainland China, if one looked at the Hang Seng you could be forgiven for thinking independence prevails. There seems to be a complete disconnect with Chinese equities listed in Hong Kong with the Hang Seng outpacing the Shanghai composite in 2012 to close the year out at 12 month highs. This disconnent is likely to reverse or be closed in Chinese equities favour in 2013.

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