China Investor Beating 98% of Peers Bets on Hong Kong Stocks

(Bloomberg) --

After beating almost all rivals in China with 45% return in one equity fund, investor Qu Yang is shifting his money into Hong Kong.

The money manager at Qianhai Kaiyuan Fund Management Co. has boosted the proportion of Hong Kong shares in one of his winning funds to more than 30% over the past three months, according to the fund’s latest fact sheet. That compares with just 13% at the end of the first quarter and is the highest allocation to Hong Kong stocks in almost two years, the fund’s historical reports show.

“Hong Kong stocks have a better chance than A shares of outperforming in the second half," said Qu in an interview on July 4. Qu, whose Qianhai Kaiyuan SH-SZ-HK Advance Selected Flexible Allocation Mixed Fund is beating 98% of its peers, has sold some of his best-performing mainland stocks and bought the city’s casino and consumer-related shares.

A likely rate cut by the U.S. Federal Reserve should draw more foreign investors to equities in the city, where valuations remain below historical averages, according to the fund manager who oversees some $970 million.

Global traders are expecting a quarter-point interest rate cut by the Fed this month, with officials possibly easing by a half-percentage point, moves that would lure capital out of the U.S. to markets elsewhere that offer higher returns. The Hang Seng Index is one of the world’s cheapest major benchmarks.

Hong Kong stocks are near the widest discount to their mainland peers in 16 months. Chinese investors piled into Hong Kong shares at the fastest pace in more than a year in June and continued their purchases this month, according to data compiled by Bloomberg. Credit Suisse this week upgraded both China and Hong Kong stocks to market weight from underweight in its Asia allocation excluding Japan.

Shenzhen-based Qu is bullish on firms that benefit from China’s growing domestic demand, including internet companies listed in Hong Kong. Macau casino operators also stand to gain from their grip on the world’s biggest gambling hub, as well as increasing inbound travel to the city, he said.

According to his fund’s quarterly report, Qu boosted assets in SJM Holdings Ltd. in the second quarter, while Sands China Ltd. and Tencent Holdings Ltd. were among the fund’s top 10 holdings by value. Representatives for Qu’s firm have not replied to Bloomberg’s requests for an update on his views since the July 4 interview.

A-Share Picks

Qu isn’t abandoning mainland equities. He still likes high-end liquor makers, for one. Kweichow Moutai Co., which featured among the fund’s top 10 holdings at the end of June, has climbed about 60% this year and recently became the first Chinese stock to hit 1,000 yuan ($145).

“More consumers will be willing to buy more expensive baijiu due to China’s consumption upgrade,” Qu said, referring to the popular liquor Moutai makes.

The holdings Qu sold last quarter include pig breeders because of uncertainty caused by the spread of African swine fever in China. He has cut holdings of one of his top-performing stocks Wens Foodstuffs Group Co., according to the fund’s quarterly report. Wens rallied 55% in the first three months of 2019 and then fell 12% in the second quarter.

To contact the reporters on this story: Jeanny Yu in Hong Kong at jyu107@bloomberg.net;Ludi Wang in Shanghai at lwang191@bloomberg.net

To contact the editors responsible for this story: Sofia Horta e Costa at shortaecosta@bloomberg.net, Magdalene Fung, Will Davies

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