• Fidelity, GAM says China equities may outperform in the second half
• Earnings estimates for China, and Hong Kong stocks are on the rise

Some global money managers betting on China stocks are taking July’s selloff in their stride, keeping the faith that Beijing will pull out all the stops to boost the economy.

Fidelity International Ltd., Aberdeen plc, and GAM Investment Management are among those expecting China to outperform global equities in the second half as recession fears grip major markets. For heavyweight tech firms traded in Hong Kong, Federated Hermes Inc. and Brandes Investment Partners LP say the worst of the crackdown is priced in.

China and Hong Kong shares have seen their world-beating rebound fizzle out in July as rising virus cases, mortgage boycotts, and fresh regulatory action on internet giants triggered knee-jerk selling. But to bulls, a gradual reopening from lockdowns, wrapping up of the regulatory probe into Didi Global Inc. and hopes of market-friendly measures leading up to the all-important National Party Congress are reasons to be optimistic.

“The market has baked in most of the negative news over the short term. Now it seems it’s in a consolidation stage awaiting for clarity on the policy support,” said Steven Luk, chief executive officer at FountainCap Research & Investment in Hong Kong. China’s “central bank has more bullets than the West such that the government can still rely on both monetary and fiscal policy to stimulate the economy.”

Market moves also suggest the pessimism that engulfed markets early in July has started to fade. The Hang Seng Index rose this week following a slump in the prior period that was the worst in more than two years, while declines in the CSI 300 Index slowed. The two gauges are down nearly 6% in July.

Meanwhile, foreign net outflows from mainland shares slowed to some 3.8 billion yuan ($562 million), less than a fifth of last week’s. And for the past month, equity exchange-traded funds focused on China attracted the most net inflows globally.

Policy Decoupling

At a time when interest-rate hikes in most countries are tightening financial conditions and threatening a recession, Beijing’s determination to keep the economy afloat and deploy stimulus stands out. Although China can’t be immune to a global downturn, it’s benefiting from a lack of alternatives for money managers looking to invest cash.

“China’s policy has decoupled from the other major economies,” said Jian Shi Cortesi, a Zurich-based investment director at GAM. “If the global equity index moves sideways or goes down gradually, China equity could still perform well.”

Investors are cautiously optimistic that even as Covid cases rise, the government will use narrower lockdowns to avoid causing further damage to the economy. Efforts are also being made to resume international flights and reduce quarantine requirements, signaling a boost to consumption and travel stocks.

Reopening bets are feeding into profit forecasts. Forward earnings estimates for both the CSI 300 Index and the Hang Seng Index appear to have bottomed, with the mainland gauge’s rising about 2% since mid-June. Forecasts for MSCI Asia Pacific Index members as a whole continue to decline.

“China consumption plays are deep value right now, but they will start to become more interesting as we go through this year,” said Prashant Bhayani, chief investment officer for Asia at BNP Paribas Wealth Management.

However, a big hangover for markets remains, with indications that there is no easy way out of China’s property crisis. Goldman Sachs Group Inc. strategists, while staying overweight on mainland shares, trimmed their estimates for the MSCI China Index citing concern over the earnings impact of homebuyers’ revolt to boycott mortgage payments. For many investors, property stocks are a no-go area.

A full-blown crisis, though, is seen as unlikely as the government will move swiftly ahead of the Communist Party’s national gathering in autumn.

“It will be three steps forward, and one to two steps back, but that will be an opportunity and not signs of another downturn,” Andrew McCaffery, global chief investment officer at Fidelity International, said at a briefing this week.

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