The Big Short's Burry: Now is the Perfect Time to Buy Hong Kong Stocks

Original Author: Zhao Ying

Original Source: Wall Street CN

The battle between bulls and bears, epitomized by Michael Burry, is playing out in the Hong Kong stock market, with bullish voices increasingly converging.

Michael Burry, the investor who shot to fame for accurately predicting the 2008 US subprime mortgage crisis and was immortalized as the protagonist of the film "The Big Short," recently publicly stated that now is an "excellent time" to look for bargains in the Hong Kong stock market. His bullish logic is predicated on the belief that the global AI chip stock rally is cooling, anticipating that capital will flow out of South Korea, Japan, and the semiconductor sector, rotating into undervalued markets.

Simultaneously, Wang Yajun, Head of Equity Capital Markets for Asia at Goldman Sachs, pointed out that the Hong Kong market has effectively entered the AI era, even though the major indices have yet to reflect this reality.

Both perspectives, from different angles, converge on the same conclusion: there is a significant divergence between the current sluggish performance of Hong Kong stocks and the underlying vitality within the market. This divergence itself may present an investment opportunity. For investors seeking value, the appeal of Hong Kong stocks is on the rise.

Burry Bullish on HK Stocks: Value Trap Post AI Hype

Michael Burry, founder of Scion Asset Management, posted on X platform on July 17, stating, "It's an excellent time to look for bargains in Hong Kong stocks. These should perform well once the shine fades from South Korea, Japan, and SOXX (Semiconductor ETF)."

Burry's comments come against a specific market backdrop. Global chip stocks have recently faced massive sell-offs as market skepticism grows over whether AI companies can translate their technology investments into real profits. Coupled with high capital expenditure pressures, the previously market-leading semiconductor sector is under strain. In contrast, the decline in Hong Kong stocks this year makes their valuations relatively more attractive.

Notably, Burry has already moved beyond words earlier this month. According to Bloomberg, he increased his holdings in Chinese e-commerce giant JD.com and established new positions in DraftKings and Flutter, signaling that his bullish stance on Hong Kong stocks and related US-listed Chinese companies is not merely rhetorical.

Hong Kong Stocks Significantly Underperform Major Global Markets This Year

Data-wise, the relative weakness of Hong Kong stocks is evident. The Hang Seng Index has fallen about 7% year-to-date, while the Hang Seng Tech Index has dropped even further by 15.22%, primarily dragged down by weak consumer spending and market pessimism regarding the outlook for China's e-commerce sector.

This starkly contrasts with the strong performance of other major global markets. Per Bloomberg data, South Korea's benchmark index has surged 62% year-to-date, fueled by the stellar performance of its two chip giants; Japan's Nikkei 225 has risen 26%; and the iShares SOXX ETF, tracking the semiconductor sector, has skyrocketed 76%.

It is precisely this significant underperformance that leads Burry to believe Hong Kong stocks are primed for bargain hunting. When global capital begins to reassess the sustainability of the AI boom, previously overlooked Hong Kong stocks might present an opportunity for a catch-up rally.

Goldman Sachs: Index Misrepresents Reality, HK Market Already in AI Era

Goldman Sachs offers a different perspective – the Hong Kong market's sluggishness is, to some extent, an "illusion" caused by structural lags in the indices.

Wang Yajun, Head of Equity Capital Markets for Asia (ex-Japan) at Goldman Sachs, recently stated at a media briefing, The Hong Kong market has entered the AI era, but the major stock indices have not yet reflected this reality. This is the fundamental reason for the "ice and fire" phenomenon where the IPO market is hot, yet index performance is sluggish.

Wang pointed out that AI is the hottest topic in the Hong Kong market this year, with AI-related stocks being the most actively traded, best-performing, and raising the most capital. However, adjustments to index constituent stocks take time, leading to a mismatch between indices and the true state of the market. He forecasts that total equity financing in the Hong Kong market this year could hit a record high, with full-year IPO fundraising potentially surpassing the 2021 historical peak, and more AI companies are expected to list in Hong Kong in the second half of the year.

On fundamental assessment, Wang believes that driven by end-demand growth, capital expenditures by AI companies will continue, providing a foundation for the long-term performance of the related sectors.

Converging Bullish Views, But Divergence Remains

Burry is not alone in his bullish view. According to Bloomberg, Morgan Stanley has also recently urged investors to buy Hong Kong stocks, citing optimism about corporate earnings prospects and the belief that the impact of the lockup expiry will be relatively limited.

However, the bullish thesis for Hong Kong stocks is not without challenges. The Hang Seng Index's decline this year reflects persistent market concerns about the pace of China's consumption recovery and the profitability of the e-commerce industry. These structural pressures are unlikely to dissipate entirely in the short term. The "index-market mismatch" described by Goldman Sachs' Wang also implies that ordinary investors, if only using indices as a reference, might both underestimate the structural opportunities within Hong Kong stocks and overlook the ongoing pressure on traditional heavyweight components.

For investors, Burry's bottom-fishing signal and Goldman Sachs' AI narrative together paint a picture of opportunity in the Hong Kong stock market. Yet, how to precisely allocate between a generally pressured index and structural highlights remains the core question facing the market.