(July 11): BlackRock Inc remains most overweight Chinese stocks in Asia, saying a recent market rout looks overdone as the country’s corporate fundamentals are still solid.

Investors are pricing in the “very worst-case scenario” and the market has been “over-punished,” said Lucy Liu, BlackRock’s portfolio manager for global emerging markets equities, at a briefing Tuesday (July 11). She cited resilient earnings, more economic stimulus and a stabilization of US-China relations as near-term catalysts.

BlackRock, which oversees about US$9.1 trillion (RM42.4 trillion) in assets globally, turned overweight Chinese equities in February, citing short-term opportunities from the nation’s reopening from Covid curbs. Since then, a suite of Wall Street banks have trimmed their expectations on the world’s second-biggest stock market as the country’s growth recovery faltered.

The MSCI China Index has recently fallen into a bear market after dropping more than 20% from a January peak, while the yuan hovered near an eight-month low against the dollar amid worries about an ailing economy.

China’s economic slowdown has also shone a spotlight on its hidden local debt, with state-owned banks offering extra lending support to ease a credit crunch. However, BlackRock said it believes the local government debt risks are manageable.

“There is very little risk for this issue to become a systemic risk because policy banks and the central government have a strong balance sheet to solve the problem if they need,” said Liu.

In the bond universe, BlackRock favours state-owned and high-quality developers as the property crisis unfolds, saying risks may continue to weigh on distressed builders. The yuan may also stabilise in the second half of the year if fresh stimulus materialises and growth picks up, said Yii Hui Wong, BlackRock’s

Asia fixed income and credit portfolio manager.

There are still “plenty of bottom-up opportunities in China markets,” Liu said, recommending the tech sector as selected artificial intelligence-related firms should continue to outperform. She also sees opportunities in consumption recovery and industrial automation.

There’s a risk of global investors being “too underweight” on China, Liu said. “Any sort of positive data points on economic recovery or any policy stimulus can trigger some positioning aligning or review, as well as some short squeeze in the China market.”