Sell-off is knee-jerk, long-term view bullish

This week's sell-off in Chinese stocks reflects investors' knee-jerk reaction to perceptions of rising uncertainties, which were sparked by China's sweeping regulatory moves targeting the country's technology giants and private companies in the education sector, fund managers and market observers said on Thursday.

But, they hastened to add, investors' long-term bullish view on China's economy and its equities has not changed.

Stocks in the A-share market rebounded on Thursday as investors' fears seemed to have eased after digesting the nitty-gritty of the recent stringent regulatory measures, which are said to aim at preventing disorderly expansion of financial capital and strengthening anti-trust regulations.

The benchmark Shanghai Composite Index recovered 1.49 percent to close at 3411.72 points after the A-share market suffered the brunt of the sell-off on Monday and Tuesday.

Some 4.3 trillion yuan ($664 billion) in total market value was wiped out in just two trading days. The market showed signs of rebound during Wednesday's trading with a net capital inflow of 12 billion yuan from overseas investors.

While uncertainties may still linger in the short term as investors are eagerly waiting for more policy details and are digesting the possible outcomes for affected industries, in the mid to long term, sophisticated international investors would still view China as an attractive investment destination and a hunting ground for equities that could generate relatively high returns, experts said.

Jeff Li, London-based head of global equity at EFG Asset Management, said investor concern over regulatory uncertainties prompted many foreign investors to reduce their exposure to Chinese equities. But the regulatory measures, if implemented properly, should significantly increase the sustainability of China's long-term growth despite short-term volatility.

Li said: "For industries that have fallen under the scope of the regulation, the near-term pressure and uncertainty are unavoidable. However, the long-term impact should be much more positive as the regulations should in general make the industries' growth healthier and more sustainable.

"For sophisticated institutional investors with long-term investment horizon, I personally believe their positive view on China market hasn't changed. I even believe many are taking advantage of the current and any further weakness as a great opportunity to add to China.

"There are many attractive long-term mega trends in China, unparalleled by any other country. We still believe China is the hunting ground for the largest amount of 10 baggers or 100 baggers globally in the coming decades."

Joe Perry, a senior analyst with Gain Capital, echoed the view. "In the near term, investors tend to be risk-averse as uncertainties still linger. However, in the mid to long term, we believe international investors would still overweight China as it offers incomparable economic growth rate or investment returns.

"Instead of the heavily invested internet and education sectors, international investors would probably look to allocate more capital to other sectors with rosy growth prospects and policy tailwinds, for example, high-end manufacturing, clean energy, supply chain of electric vehicles and semiconductors."

Most analysts said they believe China's economic recovery remains on a steady path despite slowing growth momentum as business activities have gradually returned to pre-COVID-19 level. The solid fundamentals of the Chinese economy were also supported by the country's effective measures to contain the spread of the novel coronavirus, its long-term goal to push for high-quality development and its commitment to higher level reform and opening-up, they said.

"We are currently optimistic about the future of the Chinese economy and the market, at least for those companies that are valuing at right prices," said Chen Jiahe, chief investment officer at Novem Arcae Technologies, a Beijing-based wealth management firm.

"Some blue-chip companies, including State-owned enterprises, are trading at extremely low valuations in both A-share and Hong Kong markets. These companies have stable growth rates. There are reasons to believe that they can generate good returns in the coming years."