Why JPMorgan still likes Chinese stocks

Published Thu, Jul 2 201510:19 AM EDTUpdated Thu, Jul 2 201510:21 AM EDT

Evelyn Cheng @in/evelyn-cheng-53b23624 @chengevelyn

The Shanghai bear market is not scaring a major asset manager. In a presentation Wednesday, JPMorgan Asset Management reiterated its bullish stance on secular growth sectors in mainland Chinese stocks. "We would be buyers on weakness as we believe this to be liquidity driven with undifferentiated selling, rather than a result or indication of fundamental deterioration," said Jennifer Wu, client portfolio manager within the Emerging Markets and Asia Pacific Equities team based in London. As of May 29, JPMorgan's China Region Fund (JFC) had $153.7 million in assets and approximately 25 percent allocation to mainland A-shares. Its holdings with the highest contributions to active returns for the first five months of the year include: Ping An Insurance, train maker China CNR, Tencent and Aisino and Beijing eGova, which both provide information technology and services for the government. Matching the exponential rally in mainland stocks in the last 12 months, the funds' shares have gained 39 percent over that time period. Wall Street strategists are mixed on whether the Chinese market has peaked. The Shanghai Composite plunged more than 5 percent on Wednesday, continuing recent extreme volatility in the stocks that sent the market into bear territory—more than 20 percent off its 52-week high—in the last two weeks. The index is still up 25 percent year-to-date. The other A-share exchange in Shenzhen is 25 percent below its 52-week highs and is up 66 percent year-to-date. Clem Miller, investment analyst at Wilmington Trust Advisors, pointed out that as severe as the recent selloff is, the Shanghai Composite "has a long way to go to the average of last year." "I believe the general trend will be a move upward. The downward correction is a matter of weeks, maybe a month or so," he said. Miller favors the Hong Kong-listed H-shares as an investment proxy to the more volatile mainland listed stocks. The Hang Seng is up 11 percent for the year and just 8 percent below its 52-week high. In contrast to JPMorgan's long-term bullish stance, Morgan Stanley believes the decline in China A-shares is "probably not a dip to buy." Read More The risk-off trade on Greece, China, Puerto Rico "We think the balance of probabilities is that the top for the cycle on Shanghai, Shenzhen and ChiNext has now taken place," Morgan Stanley analyst Jonathan F. Garner said in a June 26 note. The ChiNext is a tech-oriented exchange, much like the Nasdaq in the United States. "We remain concerned over four factors: a) increased equity supply, b) continued weak earnings growth in the context of economic deceleration, c) high valuations, and d) very high margin debt to free float market capitalization," the report said. The JPMorgan fund's secular growth thesis favors Internet stocks such as Alibaba and Tencent. The fund is also bullish on health care stocks as the Chinese population ages and spends more on health services. Environmental protection should also do well as China steps up efforts to raise standards in that area, JPMorgan's Wu said. "We think there's a lot more room for the equity portion to grow and hence why China should be looked at," she said, noting that the Chinese have relatively much lower allocations to equities than their American counterparts. Read More China's exchanges to lower transaction fees: Report In addition, she said the likely eventual inclusion of A-shares in the $4 trillion MSCI Emerging Market index will boost asset allocations to China. Correction: This story has been updated to reflect the percentage of A-shares in the fund as well as its U.S. ticker symbol.

Investors observe stock prices in Huaibei, China.

ChinaFotoPress | Getty Images

The Shanghai bear market is not scaring a major asset manager.

In a presentation Wednesday, JPMorgan Asset Management reiterated its bullish stance on secular growth sectors in mainland Chinese stocks.

"We would be buyers on weakness as we believe this to be liquidity driven with undifferentiated selling, rather than a result or indication of fundamental deterioration," said Jennifer Wu, client portfolio manager within the Emerging Markets and Asia Pacific Equities team based in London.