Don't Panic, Opportunity Knocks! BofA Recommends Buying Any Dips in Chinese Equities

The CSI 300 index has seen modest performance recently, entering a correction phase after the National Day holiday on October 8th. What should investors do next? According to Michael Hartnett, a strategist at Bank of America Corp. (BofA), the answer is clear: buy into any weakness in Chinese stocks.

Hartnett and his team at BofA predict that asset allocations to China will increase as economic growth forecasts improve and bond yields rise. "We recommend buying any dips in China," the strategist noted in a report. He also mentioned that Chinese policymakers are hinting at using capital markets aggressively to revive domestic demand and boost investor confidence.

For the week ending October 10, stock funds attracted an impressive $39.7 billion, with emerging markets receiving a record-breaking inflow of $40.9 billion. China alone accounted for $39.1 billion of that total, marking the largest contribution in history, according to BofA's data from EPFR Global.

Investors are putting their money where their confidence is. One top-performing Chinese hedge fund is buying the dip in Hong Kong-listed Chinese tech stocks, highlighting that valuations remain attractive despite a strong rally earlier this year.

Shenzhen-based Huaan Hexin Private Investment Fund Management Co., which manages nearly 6 billion yuan ($849 million), is increasing its holdings after the Hang Seng Tech Index dropped 14% over two days earlier this week. Yuan Wei, the firm’s founder and fund manager, sees the dip as a buying opportunity. "If you compare their fundamentals, these stocks are still very cheap," Yuan said.

Yuan believes that the market is rebounding from extremely bearish levels to what remains an undervalued state. While the long-term upside partly depends on how effective stimulus measures are in boosting the economy, Yuan points out that internet firms like Tencent Holdings Ltd., Alibaba Group Holding Ltd., and Meituan have seen profitability turn a corner since last year. The improving environment in the tech industry could offset any pressure on earnings from the broader economic slowdown, making these companies "safe havens," Yuan added. He emphasized that their profit growth far exceeds the impact of macroeconomic fluctuations, and should the economy improve, these firms would benefit further.

Yuan estimates a 50% chance that the onshore market is entering a bull run rather than just a short-term rebound. However, much of this will depend on the success of efforts to stabilize the property sector. "The bear market may already be over," he said.

As of September 30, Huaan Hexin’s flagship Stable Fund had delivered a 60% return year-to-date, bringing its total gain since inception seven years ago to 825%.