Investors looking for bargains in the Chinese market should be careful, as equities there could suffer further losses, cautions Kelvin Tay of UBS Global Wealth Management.
“I think there’s actually more room for this to actually happen,” Tay, regional chief investment officer at the firm, told CNBC’s.Squawk Box Asiaon Wednesday. “I certainly don’t think this is the bottom.”
After a defeat that started late last week and then accelerated the Hang Seng Index in Hong Kong fell more than 8% in just two days, China’s markets are now among the worst performing in Asia Pacific to date.
Tay said many institutional funds are currently reassessing risks as China’s regulation focuses on sectors such as technology and private education. He explained that the process will likely take a few weeks before funds make a final decision on whether to liquidate or accumulate more shares in China’s markets.
“I think the decision will probably go in the direction of the liquidating side,” Tay warned. “I don’t think this is really time for fishing.”
Tay said Beijing’s regulatory action coincides with a “window of opportunity” as the global economy recovers from the pandemic.
“Economic growth this year is out of the question, because you have US growth of 7% and Eurozone recovery of 4.3%, which in turn will probably pull the Chinese economy as well,” he said. .
In addition, next October’s Politburo meeting will coincide with the end of Chinese President Xi Jinping’s second five-year term — a “very, very important event” for the country.
Looking ahead, Tay predicted that three potential catalysts could end China’s current uncertain regulatory outlook.
“I think the first indication should come sometime this week or next week from the Politburo’s July meeting,” he said, adding that the event “will be closely scrutinized by investors” for regulatory clues.
The next potential catalyst is if the Chinese economy sees a major slowdown, a scenario he described as “highly unlikely.”
“Ironically, if the economy slows dramatically from here, they’re likely going to step back because you can’t afford to tighten things up on a regulatory basis…and not risk the economy tipping over,” explained Tay.
The final catalyst, which Tay said was the “least likely” of the three, is when US-China relations see a “dramatic improvement” overnight.
“That will also lead to sentiment actually getting better,” he said.
Relations between Washington and Beijing remain tense. China’s deputy foreign minister recently said that the economic giants “now in a stalemate.”