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

Original Author: Zhao Ying

Original Source: Wall Street News

A tug-of-war between bulls and bears, epitomized by Michael Burry, is playing out in the Hong Kong stock market, with bullish voices steadily converging.

Michael Burry, the investor who famously predicted the 2008 US subprime mortgage crisis and was immortalized in the film "The Big Short," recently stated publicly that now is an "excellent time" to look for bargain stocks in the Hong Kong market. His bullish logic is based on the prediction that the global AI chip stock rally will cool down, leading capital to flow out of South Korea, Japan, and the semiconductor sector to seek undervalued opportunities.

Meanwhile, Wang Yajun, Head of Equity Capital Markets for Asia at Goldman Sachs, also pointed out that the Hong Kong market has essentially entered the AI era, even though the major indices have not yet reflected this reality.

Both perspectives, from different vantage points, point to the same conclusion: there is a significant divergence between the Hong Kong market's current sluggish performance and its underlying vitality. This divergence itself may present an investment opportunity. For investors seeking undervalued markets, the allure of Hong Kong stocks is increasing.

Burry Bullish on HK Stocks: A Value Play After the AI Hype Fades

Michael Burry, founder of Scion Asset Management, posted on X platform on July 17, stating, "It's an excellent time to look for bargain HK stocks, which should do well once the spotlight fades from Korea, Japan, and SOXX."

Burry's statement has a specific market backdrop. Global chip stocks have recently experienced significant sell-offs, with growing doubts about whether AI companies can translate their technological investments into actual profits. Coupled with high capital expenditure pressures, this has put pressure on the previously leading semiconductor sector. In contrast, Hong Kong stocks have become relatively more attractive in valuation due to their declines this year.

Notably, Burry has already taken action earlier this month. According to Bloomberg, he increased his stake in Chinese e-commerce company JD.com and established new positions in DraftKings and Flutter, indicating his bullish stance on Hong Kong stocks and related US-listed Chinese stocks is not just talk.

Hong Kong Stocks Significantly Lag Behind Major Global Markets This Year

On a data level, the relative weakness of Hong Kong stocks is clear. The Hang Seng Index has fallen about 7% year-to-date, while the Hang Seng Tech Index has dropped even more, by 15.22%, primarily dragged down by weak consumer spending and pessimistic market sentiment regarding the prospects of China's e-commerce sector.

This contrasts sharply with the strong performance of other major global markets. According to Bloomberg data, South Korea's benchmark index has surged 62% year-to-date, benefiting from the robust performance of its two chip giants. Japan's Nikkei 225 index is up 26%, and the iShares SOXX ETF, which tracks the semiconductor sector, has soared 76%.

It is precisely this significant underperformance that leads Burry to believe Hong Kong stocks meet the criteria for "bargain hunting." As 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 Disconnect; HK Market is Already in the AI Era

Goldman Sachs offers a different perspective for interpretation – that the sluggishness of Hong Kong stocks is, to some extent, an "illusion" caused by structural lag in the indices.

Wang Yajun, Head of Equity Capital Markets for Asia (ex-Japan) at Goldman Sachs, recently stated during a media briefing that 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 "fire and ice" contrast between the hot IPO market and the sluggish index performance.

Wang Yajun pointed out that AI has been 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 the indices and the true state of the market. He predicts that total equity financing in the Hong Kong market this year could hit a record high, and full-year IPO fundraising might surpass the historical peak seen in 2021, with more AI companies expected to list in Hong Kong in the second half of the year.

Regarding fundamentals, Wang Yajun believes that driven by growth in end-user demand, capital expenditure by AI companies will continue, providing a foundation for the long-term performance of the relevant sectors.

Bullish Voices Converge, But Divergence Remains

Burry is not alone in his bullish stance. According to Bloomberg reports, Morgan Stanley has also recently called on investors to buy Hong Kong stocks, citing optimism about corporate earnings prospects and the belief that the impact of the lock-up share expiry will be relatively limited.

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

For investors, Burry's bottom-fishing signal and Goldman Sachs' AI narrative together paint a picture of opportunity in the Hong Kong stock market. However, how to precisely navigate between the overall pressure on the indices and the structural highlights remains a core challenge facing the market.