China Investors Say Worst Yet To Come For Property

By John Liu and April Ma, Bloomberg Markets Live reporters and strategists

China’s property sector has yet to see the worst of the crisis that has cast a pall over the nation’s economy and helped drive an exodus of global funds from the world’s second-largest stock market.

That’s the view from nine of 15 respondents in an informal Bloomberg News survey of analysts and money managers based in Hong Kong and mainland China. Six of them listed housing woes as the biggest risk for equities for the final quarter of 2023, followed by geopolitical tensions.

The results are a reflection of the worsening malaise in China’s real estate industry, as policymakers appear reluctant to undertake more aggressive stimulus measures lest they may fuel long-term financial risks. Sentiment worsened last week as worries about liquidity and weak housing demand intensified, sending a Bloomberg Intelligence gauge of property stocks to its lowest level in 12 years.

Pessimism over the property sector aside, the informal survey showed investors have otherwise turned optimistic on the overall market given a series of recent policy support measures and inexpensive valuations. Roughly around 70% of the respondents said they plan to add stock positions both onshore and in Hong Kong.

“We are in the worst of this cycle and we are not out of woods yet. It’s going to take a long time for the current property crisis to be over,” said Kenny Wen,  head of investment strategy at KGI Asia Ltd. who participated in the informal poll. “Before the property crisis is properly handled, it’s unlikely for the stock market sentiment to recover meaningfully.”

Investors may be staring at an added level of uncertainty after China Evergrande Group — an indebted real estate conglomerate which sits at the center of the sector’s years-long crisis — said Thursday that its billionaire chairman Hui Ka Yan is suspected of committing crimes. Meantime, Country Garden Holdings Co., formerly China’s biggest developer, continues to fight an uphill battle to avert a public bond default.

The CSI 300 Index benchmark is down 4.7% so far in 2023, on track for an unprecedented third straight year of losses. That’s dragged the gauge’s valuation to 10.8 times its estimated earnings for the next 12 months, almost two points below the five-year average.

The CSI 300 is expected to end the year at 4,100, based on the median forecast of the informal poll, implying a potential gain of about 11% from the latest close. The Hang Seng Index is projected to hit 20,500, indicating upside of around 15%, the results showed.

More than half of the informal survey’s respondents said they see equities as the best investment option at the moment, versus cash or commodities. Nine out of the 15 polled also ruled out the need for state-backed funds to support the market in the fourth quarter.

Overseas investors sold about 37 billion yuan ($5.1 billion) of mainland China stocks on a net basis in September via trading links with Hong Kong. That’s after a record 90 billion yuan selloff last month, which drove their positioning to the lowest since October 2022, when the nation’s reopening from stringent Covid curbs sparked a sharp rebound over the next three months.

The continued selling by foreign funds has driven bets that the worst of outflows may be over. Less than a third of those surveyed expected fund flows via the so-called Stock Connect program to turn negative on a net basis for the year.
“Yuan assets, especially A shares, are currently very cheap and many pockets of the market are oversold,” said Zhu Houzhong, a fund manager at Shanghai Youpu Investment Co. who took part in the informal poll.