A New York-based emerging markets equities fund, the Pzena Emerging Markets Value Fund, has defied the market consensus by increasing its holdings in Chinese stocks. Despite this year’s extensive selling in Chinese equities, the fund believes the downturn is overblown, seeing an opportunity in the undervalued stocks. The fund raised the weighting of China and Hong Kong stocks to approximately 33% of its portfolio in the third quarter, a notable increase from the 29% represented in MSCI Inc.’s gauge of emerging markets.
Allison Fisch, a money manager at the $1.5 billion fund, highlighted the perceived value opportunity resulting from the indiscriminate selling of Chinese stocks. Fisch noted that the fund has strategically acquired shares of companies deemed exceptionally cheap relative to their normalized earnings power. The move by Pzena contradicts the prevailing sentiment, with exposure by the top 100 emerging market funds to China and Hong Kong reaching the lowest level in five years during the third quarter.
The decision to increase exposure aligns with a tactical approach by some fund managers who see potential opportunities as Chinese policymakers implement measures to boost liquidity and restore consumer confidence in a struggling economy. The MSCI China Index has experienced a decline of over 14% this year, with its market value plummeting by more than half from its 2021 peak. Currently trading at 10.2 times its 12-month forward earnings, the index appears undervalued compared to its five-year average of 13.5 times.
Pzena’s strategy includes adding commercial lender China Merchants Bank Co. and WH Group Ltd., a leading pork company, to its portfolio. The fund’s focus on companies with significant foreign revenues, such as Weichai Power Co. and Haier Smart Home Co., has contributed to its outperformance, ranking better than 97% of its peers over the last three years. Pzena Investment Management, overseeing about $56.4 billion in assets globally as of September 30, 2023, emphasizes that quality Chinese businesses with massive scale should not be overlooked despite prevailing market sentiment.
