Hedge Fund Veteran Gives Up on Chinese Stocks

(Bloomberg) -- John Foo, who has managed long-only and hedge funds in Asia for 20 years, has sold out of Chinese stocks for the first time in his career as a money manager.

Foo's Kingsmead Asset Management ended all bullish and bearish bets on China stocks about two months ago, as trade tensions and domestic credit tightening intensified, he said in an interview. Singapore-based Kingsmead manages about $60 million in an Asia-focused hedge fund and also oversees client money in separate accounts.

“There are indeed cheap Chinese stocks, but there are many uncertainties,” Foo said.

Foo's decision to exit Chinese stocks has proven prescient as a $2 trillion rout deepened in the past week on concern a trade dispute with the U.S. will damage an economy already struggling with the effects of a deleveraging drive. China's benchmark stock gauge on Tuesday approached levels last seen during a bout of panic selling in January 2016.

China stocks, mainly those listed in Hong Kong and the U.S., previously accounted for 40 percent of the fund's net exposure, a gauge of risk measuring the difference between bullish and bearish bets.

It will take the yuan weakening beyond 7.5 to the dollar, “some meaningful deleveraging” and a 30 percent drop in valuations to entice him back, said Foo, who previously managed money at Frontpoint Partners. The yuan touched an 11-month low Tuesday after suffering its biggest decline in 14 years last quarter, and the Shanghai Composite Index closed little changed after falling as much as 1.9 percent.

Kingsmead joins firms such as FengHe Fund Management and Pinpoint Asset Management in cutting allocations to China stocks.

Read more: Trade war has hedge funds diving for cover in China

Kingsmead's hedge fund has fallen 7 percent this year because it doesn't hedge currency risks, Foo said, and most Asian currencies have weakened against the dollar. The Asia fund gained 22 percent last year, compared with a 20 percent return for similar strategies tracked by Eurekahedge Pte.

Among the stocks Foo sold were auto-dealers, which are likely to suffer when China slaps a retaliatory 25 percent on U.S.-made vehicles. Tighter credit in China as the government tackles ballooning household debt could also erode auto-dealers earnings growth, he said.

He has also sold Chinese financial stocks and export-related companies, he said, declining to name them.

With China out of favor, Kingsmead is increasing investments in Vietnam, such as Dat Xanh Group, the country's largest real-estate broker, and Hoa Phat Group, the nation's biggest listed steelmaker, which are benefiting from rising property and infrastructure demand.

Foo says a prolonged trade war will give companies more incentive to move factories to Southeast Asia.

“The beauty of these stocks is they all have single-digit price-earnings with over 20 percent growth in the next two years or more,” he said.

Kingsmead also likes Thai companies investing in the growing Mekong River region spanning Cambodia, Laos, Myanmar and Vietnam, which is less vulnerable to the trade spat, Foo said.

To contact the reporter on this story: Bei Hu in Hong Kong at bhu5@bloomberg.net

To contact the editors responsible for this story: Sree Vidya Bhaktavatsalam at sbhaktavatsa@bloomberg.net, Peter Vercoe

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