China Bears Squeezed as Traders Capitulate Fastest (Update2)
By Bloomberg News
Nov. 4 (Bloomberg) -- Bears on Chinese equities are in retreat even as bets against the country’s companies exceed those of any of the world’s biggest markets, a buy signal for some of the nation’s most accurate stock forecasters.
Short sales of Hang Seng China Enterprises Index shares dropped to an average 16 percent of equity available for lending from 21 percent at the end of August, the largest decline among indexes in the 10 largest markets, according to data compiled by Data Explorers and Bloomberg. The level compares with a 10 percent average for the Standard & Poor’s 500 Index and 7 percent for the U.K.’s FTSE 100 Index, the data show.
The index of Hong Kong-listed shares surged 15 percent in the past two months as third-quarter profits beat analysts’ estimates by twice the margin in emerging markets and confidence grew that China’s government will prevent the quickest-expanding major economy from overheating. Morgan Stanley and China International Capital Corp. strategists who predicted the rally say it will continue through yearend and may lead more investors to buy back stocks. When short sales fell this much in May 2009, the Hang Seng rose 24 percent in six months.
“Many investors are quickly changing course and being forced to cover their shorts,” said Sandy Mehta, the chief investment officer at Hong Kong-based Value Investment Principals who forecast a rally in Chinese shares at the end of July. “This will gather momentum.”
Short sellers borrow and sell stock to bet that prices will drop so they can repurchase the securities, repay the loan and pocket the difference.
‘Short Squeeze’
The Hang Seng index climbed 0.9 percent today to the highest level since June 2008 and the Shanghai Composite Index of mainland-traded equities jumped 1.9 percent after the U.S. Federal Reserve announced it will expand record measures to boost the world’s largest economy. Goldman Sachs Group Inc. said yesterday that the Hong Kong market has the most to gain from China’s growth and the Fed’s monetary stimulus.
The high level of bearish wagers in China “could produce a short squeeze when the market continues to rally and thus could be a contrarian indicator,” Hao Hong, the Beijing-based global equity strategist at CICC, the top-ranked brokerage for China research in Asiamoney’s annual survey, wrote in an e-mailed note on Oct. 28.
Hang Seng companies reported third-quarter net income that topped analysts’ projections by an average 6.4 percent so far, compared with 2.5 percent for the MSCI Emerging Markets Index, according to data compiled by Bloomberg.
Earnings Growth
China’s third-quarter economic expansion of 9.6 percent topped the median estimate of economists in a Bloomberg News survey even as policy makers took steps to curb record lending and home-price gains that spurred concern of a real-estate bubble.
The Chinese stock gauge trades at 12.4 times analysts’ 12- month earnings estimates, a 7 percent discount to the average level since March 2006, according to data compiled by Bloomberg. The measure is valued at a 29 percent discount to the Bombay Stock Exchange Sensitive Index of shares in India, the world’s second-fastest expanding major economy.
Aluminum Corp. of China Ltd. shares rallied 19 percent in the past two months. Short sales in the unit of China’s biggest maker of the lightweight metal fell to 68 percent of lendable shares from 81 percent at the end of August. China Merchants Bank Co., the Shenzhen-based lender with 31 percent of its lendable shares sold short, rallied 9.7 percent. Lendable shares are the amount of stock that institutional investors make available for borrowing.
‘Bubble Situation’
“The government’s moves mean there is less likely to be a bubble situation,” said Jerry Lou, the Hong Kong-based strategist at Morgan Stanley who predicts gains of about 20 percent in Chinese equities in the next six months.
The level of short sales in China may not reflect pessimism because some traders are probably hedging bullish wagers or making bets that a stock will rise less than another security, according to Oppenheimer & Co.’s Paul Keung.
“You can’t always read heavy shorts as a buy signal as much as it is a function of increased volatility and increased liquidity,” said Keung, the Hong Kong-based head of Asia Investment Research at Oppenheimer.
Some of the most-shorted stocks in the Hang Seng gauge are retreating even as traders buy back shares.
Buying Opportunity
BYD Co. declined 24 percent last month as short sales dropped to 65 percent of lendable shares from 79 percent. The Shenzhen-based carmaker part-owned by billionaire Warren Buffett’s Berkshire Hathaway Inc. posted a 99 percent decline in third-quarter profit on Oct. 26 and has delayed plans to export electric vehicles to the U.S.
Pacific Sun Investment Management Ltd.’s Andy Mantel, who reduced his bets against Chinese bank shares this year, said the nation’s Hong Kong-traded equities are now “fairly priced.” Mantel, founder and managing director of Pacific Sun in Hong Kong, buys and sells stocks short for his China Mantou Fund, which jumped 51 percent in 2009, according to data compiled by Bloomberg.
Chalco, as the Beijing-based aluminum company is known, is valued at 10.4 times earnings before interest, taxes, depreciation and amortization, compared with the 15.6 times average for peers in Asian developing nations, according to data compiled by Bloomberg. China Merchants trades at 3.4 times net assets, a 19 percent discount to the average since Bloomberg began tracking the data in June 2007.
“You can get some great value plays in China today even though it’s one of the fastest-growing economies in the world,” Puru Saxena, who oversees about $350 million as chief executive officer of Puru Saxena Wealth Management in Hong Kong, said in an interview with Bloomberg Television on Oct. 19. “This is a great buying opportunity.”
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