Hedge Funds Hear “Sell” When Strategists Say “Buy”

By Ye Xie, Bloomberg Markets Live reporter and strategist

While the Chinese asset rally following the Politburo meeting Monday was impressive, the lack of follow-through suggests investors are in the “show me the money” phase.

So far Beijing has said all the right things, but it remains questionable how much it can deliver under various constraints from debt to demographics. The one silver lining is that positioning is light. In fact, sentiment is so poor that when Morgan Stanley strategists pitched the idea of going long the yuan, two of their hedge fund clients did just the opposite. So the bar for an upside surprise is relatively low.

“Politburo Meeting: A Pivotal Moment.” That’s the headline of a report from Morgan Stanley. “Not So Fast on China Hype,” says another from TD securities. These conflicting takeaways summarize where we stand on China.

The readout from the meeting – including the omission of the slogan that “housing is not for speculation” and the softening language on local government debt – excited some bulls, but the lack of policy specifics also keep bears skeptical.

The market price action offered mixed signals. On the positive side, the offshore yuan is no longer trading at a discount over the onshore exchange rate, suggesting overseas investors are less bearish. China-sensitive assets, including industrial metals, also did well.

Still, zoom out a little and it’s hard to get too excited. Copper, for instance, is barely changed over the past three months. “While the boost in sentiment is triggering large-scale algo buying activity in copper markets, we see reasons to be cautious,” wrote Daniel Ghali, senior commodity strategist at TD. “Ultimately, property sector easing is still likely, but the scale of easing is key to gauge whether it can offset structural woes driven by homebuyer confidence, local government debt and structural issues such as slowing urbanization and demographics.”

On the equity side, the Nasdaq Golden Dragon China Index gained 0.9% on Tuesday, slowing from a 4% rally on Monday.

So, it seems a case of “watch what they do, not what they say.” That skepticism is best summarized by the anecdote shared by Morgan Stanley’s strategists. When they pitched their constructive view on China during client visits over the past two weeks in New York and London, before the Politburo meeting, the pushback was strong. The strategists Min Dai and Gek Teng Khoo wrote:

Equity hedge funds believe that Chinese stocks are too cheap to short while real money investors don’t see a catalyst to get long. Most of the fixed income hedge funds have short CNY positions while real money investors are quite UW CNY.

For their part, the Morgan Stanley strategists remain positive. They recommended long yuan versus Taiwan and Singapore dollars, citing a combination of the PBOC pushback on depreciation, an upside surprise in economic policy and short covering.