Unfazed by Trade Row, This Contrarian Is Buying China Stocks

(Bloomberg) -- While the twists and turns in the U.S.-China trade spat are scaring mainland investors from the local equity market, one contrarian is adding exposure.

“We think the market has overreacted to the compound effect of domestic deleveraging and the U.S.-China trade dispute,” Shanghai Chongyang Investment Management Co.’s president Wang Qing told Bloomberg Television. “As a long-term investor with contrarian trade, we see more opportunities than risks in this market.”

Chongyang is adding financial stocks, independent power producers, consumer discretionary names with strong local brand recognition, as well as machinery equipment makers with homegrown technologies. The long-term investment thesis remains for those stocks, but valuations have become a lot cheaper, Wang said.

His firm manages 20 billion yuan ($2.9 billion) of mostly long-only A-share funds, including one flagship product that has returned 374 percent since its launch 10 years ago.

“The impact of the U.S.-China trade war will be felt over the mid- to long-term, but the damage to the stock market has already been done, perhaps has been overdone,” he said. “This is why we caution against being bearish at this moment.”

The Shanghai Composite Index has slid 17 percent this year, one of the worst performers globally and costing China its place as the world’s second biggest equity market. While investors have largely “turned a blind eye” to China’s policy shift to aid growth, Wang said, more measures could be unveiled to improve credit conditions and expand fiscal policies.

“As the policy shift takes place and the effect feeds into the market, smart investors will start to look for opportunities,” he said, adding that a rotation from bonds to equities is already underway. Companies with strong balance sheets and decent dividend yields may be good choices to begin with, as they tend to outperform.

The Shanghai Composite Index slid 1.3 percent Wednesday, after its best day in two years. The big-cap CSI 300 dropped 1.6 percent.

Among Wang’s other key points:

  • If the trade war pushes China to deregulate and open up further to cope with external pressures, it will eventually be beneficial to the economy
  • Services sector could see reforms and opening
  • Weaker yuan can largely be explained by the strong dollar; the Chinese currency is likely to remain under pressure in the foreseeable future
  • China wants the benefit of a weak currency to help the real economy and boost competitiveness, but wants to avoid the cost; if expectations of a weaker yuan were to get entrenched, it would destabilize financial markets

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