Investors looking for bargains in the Chinese market should be careful, as stocks there could suffer further losses, warns Kelvin Tay of UBS Global Wealth Management.
“I think there is actually more room for this to work,” Tay, the firm’s regional chief investment officer, told CNBC’s “Squawk Box Asia” on Wednesday. “I certainly don’t think this is the bottom line.”
Following a loss that began late last week and accelerated as Hong Kong’s Hang Seng Index plunged more than 8% in just two days, China’s markets are now among the worst performing in Asia-Pacific as of yet. the date.
Tay said that many institutional funds are currently reassessing risks as Chinese regulations target industries such as technology and private education. He explained that the process is likely to take a few weeks before the funds make a final decision on whether to liquidate or accumulate more shares in Chinese markets.
“I think the decision will probably tilt towards the liquidation side,” Tay warned. “I don’t think this is the time for bottom fishing.”
Tay said Beijing’s regulatory crackdown coincides with a “window of opportunity” as the world economy recovers from the pandemic.
“This year’s economic growth is not in dispute because we have the United States growing at 7%, the eurozone recovering to 4.3%, which in turn is likely to lead to the Chinese economy as well,” he said.
Also, next year’s Politburo meeting in October will coincide with the end of Chinese President Xi Jinping’s second five-year term, a “very, very important event” for the country.
Prospects for Chinese regulation
Looking ahead, Tay predicted that three potential catalysts could end the current uncertain regulatory landscape in China.
“I think the first indication should come sometime this week or the next of the July Politburo meeting,” he said, adding that the event will be “closely scrutinized by investors” for clues on regulation.
The next potential catalyst is if the Chinese economy experiences a major slowdown, a scenario he described as “very unlikely.”
“Ironically, if the economy slows down dramatically from here, they are likely to take a step back because they can’t afford to adjust things on a regulatory basis … and not risk the economy tipping over,” Tay explained.
The latest catalyst, which Tay said was the “least likely” of the three, is whether US-China relations experience a “dramatic improvement” overnight.
“That will also result in the feeling really improving,” he said.
The relationship between Washington and Beijing remains strained. China’s Vice Foreign Minister recently said that the economic giants are “now at a standstill. “