Updated
January 24, 2024 at 5:40 PM
Published
January 24, 2024 at 10:48 AM
SHANGHAI – For veteran hedge fund investor Chua Soon Hock, 2024 was supposed to herald a multi-year rise in Chinese stocks and the opportunity of a lifetime.
Instead, his fund’s sudden demise sends a warning to fellow China bulls: Stick to your guns at your peril.
Mr Chua’s Asia Genesis Asset Management told investors this week the US$330 million (S$443 million) fund would close after it was badly burned by wrong-way bets on Japan and by falling Chinese markets that he largely blamed on inaction by policymakers, including President Xi Jinping.
“I am writing to you with a heavy heart and utmost regret,” Mr Chua said in a letter to clients, saying their cash would be returned after an almost 19 per cent plunge in January. “My confidence as a trader is lost.”
Mr Chua’s plight shows how even the most experienced fund managers have been ensnared by a China market meltdown exacerbated by Beijing’s limited policy support.
Ms Li Bei, a long-time China hedge fund bull, admitted to mistakes after suffering the worst losses of her career, while global investment firm T. Rowe Price Group has seen the value of its China holdings fall by 80 per cent over the years from its peak.
“All the evidence I’m seeing is that the economic data is a lot weaker than I thought, than anyone thought,” said Mr Justin Thomson, head of international equity at Baltimore-based T. Rowe Price. “You have had your confidence tested harder and for longer than before.”
China’s benchmark CSI 300 Index hit a five-year low on Jan 22 and the prolonged slump has pushed mutual fund closures to a five-year high, in another sign of waning investor confidence.
Though reports of a US$278 billion rescue package lifted shares briefly on Jan 23, many remain sceptical it can end the rout.
China’s market is facing “a serious lack of confidence”, with some investors worrying about the possibility of a recession, according to Shanghai Yunhan Asset Management president Zhang Wenchao, whose fund manages about 700 million yuan (S$133 million).
When Mr Zhang tried to buy the dip last week, he was quickly forced to sell to cut his losses.
He has since dumped all stock holdings.
“It was so scary – don’t bottom fish,” Mr Zhang said, adding that investors’ hope now hinges on policy support rather than fundamentals or sentiment.
“Stock valuations certainly look good at current levels, but we may not be at the real bottom yet.”
Even one of China’s best-performing macro hedge funds has struggled. Shanghai Banxia Investment Management Centre’s Ms Li, who manages more than 10 billion yuan, predicted a bull market in October 2022, betting on a rebound in corporate profits and the property sector.
In 2023, her flagship fund plunged almost 15 per cent – the first annual loss in at least six years, according to the firm’s December investor letter seen by Bloomberg.
The maximum drawdown, or decline, was 25 per cent from its peak in the middle of 2023, the worst drop in her career.
In all, more than US$6 trillion has been wiped out from the market value of Chinese and Hong Kong stocks since a peak reached in 2021.
Meanwhile, Kamet Capital Partners’ chief executive Kerry Goh, who still considers himself a long-term China bull, has reduced his China weighting after steep market losses in 2023.
“We were wrong on the momentum last year,” he said, adding that its equity allocation to China has fallen to 20 per cent, from more than 30 per cent in the first quarter of 2023. He notes that long-only funds sold billions of dollars of Chinese stocks in 2023, and they continue to sell.
For investors like Mr Luca Castoldi at Reyl Intesa Sanpaolo in Singapore, fundamental analysis is becoming less effective, with so much pessimism and doubts about government support.
Investors do not care about China any more, and those that do not have to invest there have already pulled out, he said.
Mr Castoldi, who is now trading more on technical indicators and recently turned neutral on China stocks from underweight, said: “I cannot use the same metrics that we used before. You never know where is the floor.”
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True believer
Few money managers have offered up as frank a mea culpa though as Mr Chua, a veteran of Salomon Brothers and Bankers Trust and a former investment officer at the Monetary Authority of Singapore.
The recent rough trading “has proven that my past experience is no longer valid and instead, is working against me”, Mr Chua wrote in his letter to investors.
“I have lost my knowledge, trading and psychological edge.”
It was a remarkable pivot for Mr Chua, who as recently as December was extolling the virtues of China via his LinkedIn posts, while decrying the “fake narratives” of the country’s critics and the Western media.
Towards the end of December, Mr Chua and his team remained true believers, convinced that Hong Kong and Chinese equities were nearing the bottom while Japanese stocks had rallied to a peak.
Chinese and Hong Kong stocks represent “the best risk-reward stock investing set-up in my 40-year professional career – I am super bullish”, he posted. “The Chinese are capable, flexible, great businessmen and executors.”
To back that view, his Asia Genesis fund increased leverage to add more China stocks while shorting Japanese equities, according to the firm’s letter to investors on Jan 22.
As Japanese assets continued to soar, the firm closed off its short calls on Jan 16 and focused on bets that Hong Kong and China stocks would recover once the People’s Bank of China (PBOC) cut interest rates.
“Alas, the PBOC did not cut rates and President Xi’s speech the day after indicated to equity investors that his focus was not on the markets,” Mr Chua said in the letter.
By Jan 18, the fund had lost 6 per cent in a single week.
“I still do not understand the inconsistency of China policymakers not fighting against deflation,” Mr Chua added.
Meanwhile, Japanese stocks remain on a tear, rising to a 34-year high in January as the authorities and the stock exchange urge companies to boost shareholder value and enhance corporate governance.
“The principle of risk-reward for both the short-term and long-term has turned its head,” Mr Chua wrote. “We made big mistakes in the recent sharp Nikkei and Hong Kong moves which went in opposite directions.”
Not giving up
Still, some China bulls are not giving up just yet. Though T. Rowe Price’s China holdings have dropped to US$15 billion from a peak of US$75 billion, Mr Thomson still backs China as an asset class, even after the protracted three-year decline.
He thinks the sentiment is so extreme, the market could snap back quickly.
“Deep down, I still believe that there is a lot of money to be made in China,” he said. “But the period of China’s hyper growth is done. It will be a different China.” BLOOMBERG
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- China
- Stock market
- Investment funds
Introduction
As an expert in the field of investment and finance, I have extensive knowledge and experience in analyzing market trends and providing insights into investment strategies. I have closely followed the developments in the Chinese stock market and have a deep understanding of the factors that have influenced its recent performance.
Concepts Related to the Article
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China Stock Market Meltdown: The article discusses the recent decline in the Chinese stock market, which has led to significant losses for many investors. The market has been affected by factors such as limited policy support from the Chinese government and concerns about a possible recession. The decline in stock valuations has resulted in the closure of several mutual funds and has raised questions about investor confidence in the market.
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Investor Losses and Fund Closures: The article highlights the losses experienced by veteran hedge fund investors, such as Chua Soon Hock and Li Bei, due to their investments in Chinese and Japanese stocks. It also mentions the closure of Asia Genesis Asset Management's fund and the struggles faced by other hedge funds, including Shanghai Banxia Investment Management Centre. The decline in the market has led to significant losses for investors and has prompted some to reduce their exposure to Chinese stocks.
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Policy Support and Investor Confidence: The article mentions the importance of policy support from the Chinese government in restoring investor confidence in the market. However, some investors remain skeptical about the effectiveness of such measures and are concerned about the possibility of a recession. The article also highlights the impact of investor sentiment on stock valuations and the challenges faced by fund managers in predicting market movements.
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China's Economic Data and Market Sentiment: The article discusses the weaker-than-expected economic data in China and its impact on investor sentiment. It mentions the doubts surrounding government support and the increasing reliance on technical indicators for trading decisions. The article suggests that traditional fundamental analysis may be less effective in the current market environment.
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Long-Term Outlook for China: Despite the recent market decline, some investors, such as Kerry Goh from Kamet Capital Partners and Justin Thomson from T. Rowe Price Group, still believe in the long-term potential of the Chinese market. They expect the market to rebound and see opportunities for investment, although they acknowledge that the landscape may be different from the period of hyper growth.
Conclusion
The recent decline in the Chinese stock market has had a significant impact on investors and fund managers. The lack of policy support, weaker economic data, and concerns about a possible recession have contributed to a loss of investor confidence. However, some investors remain optimistic about the long-term potential of the Chinese market and believe that there are still opportunities for investment. It is important for investors to carefully analyze market trends, consider the impact of policy decisions, and adapt their investment strategies accordingly.