Global money managers are split as to whether buy signals are flashing for China stocks right now, even as they agree the equity market does look cheap.

The gap between Chinese company market capitalizations and the U.S. stock market was $42.5 trillion as of market close Jan. 23, based on Pensions & Investments‘ calculations using Bloomberg data. Bloomberg reported Jan. 23 that Chinese stocks have lost more than $6.3 trillion in value from a February 2021 peak, vs. a $5.3 trillion gain for U.S. equities.

China has its challenges, money managers said: The real estate market is still a concern, and policies need to be put in place to improve investor sentiment. Meanwhile, soaring demand has led China’s mutual fund houses to try to tamp down investors’ enthusiasm for U.S. stocks by putting restrictions on buying their offerings, Bloomberg reported Jan. 24.

However, there are reports of increased stimulus from China’s central bank, including a cut to the reserve requirement ratio for banks early next month and a potential $278 billion of measures to help stabilize the stock market, according to Bloomberg. There’s also the attraction of the market sell-off leaving stocks trading at below longer-term average levels.

“Our view is that market valuations are at very depressed levels and already discount a significant amount of negative news,” said Virginie Maisonneuve, global chief investment officer equity and a managing director at Allianz Global Investors.

The MSCI China A Onshore index, for example, trades at less than an 11 times forward price-to-earnings ratio — “well below longer-term average levels. The dividend yield on China A shares is also now well below the China 10-year government bond yield,” she said.

Maisonneuve thinks China’s long-term potential is still being ignored, though, and remains positive on the country and unearthing potential opportunities.

“While China is undoubtedly facing a growth challenge, particularly as a result of weakness in the property sector, in our view the very negative narrative on China fails to take into account some of the longer-term growth drivers. We see China as being at a strategic economic crossroads where future growth will increasingly come from higher-value, more innovation-driven sectors, including a focus on enhanced technology self-sufficiency and the ongoing upgrade of the manufacturing sector. The pullback in the market is bringing a number of stocks in these areas back to increasingly attractive valuation levels,” Maisonneuve said.

Allianz GI had €516 billion ($546 billion) in assets under management as of Sept. 30.

While the potential $278 billion stock market package is “a welcome measure and shows increasing responsiveness from the authorities,” Aninda Mitra, head of Asia macro and investment strategy at BNY Mellon Investment Management, said executives “fear this is still inadequate.” The package equates to less than 2% of China’s gross domestic product, he said in emailed comments.

The measures need to be “twinned with longer-term reforms to boost confidence in (the) broader corporate sector,” he said.

However, Mitra said executives would not be surprised if there were a short-term boost in investor sentiment and prices, given how cheap Chinese stocks are and how under-owned they seem to be. “But we doubt its sustainability unless these are complemented by a broader package of far-reaching reforms,” he added.

BNY Mellon IM had $2 trillion in AUM as of Dec. 31.

The need for policy to support the markets was also highlighted by Wenchang Ma, portfolio manager for Ninety One’s all-China equity strategy.

“China’s post reopening recovery has been lackluster with the property sector downturn weighing on growth,” Ma said in emailed comments. “Rising interest rates overseas and domestic deflationary pressure, as well as lingering geopolitical tension also did not help. China’s equity market valuation has shrunk to below the long-term historical average. The market beta presents favorable risk/reward, which could materialize if stronger policy support is rolled out and the property sector starts to stabilize.”

But there are “abundant” alpha opportunities given the inefficiency in markets, Ma said. “There are investment opportunities coming from high-growth industries that have been significantly derated, as well as old-economy companies that still manage to deliver resilient earnings and cash-flow returns,” she added.

Ninety One had £124.2 billion ($158.1 billion) in AUM as of Dec. 31.

Money manager Invesco’s Asian and emerging markets equities team is overweight China for two reasons, William Lam, co-head of Asian and emerging markets equities and a fund manager on the Invesco Asian Fund (U.K.), said in comments provided by a spokesperson.

The first reason is that valuations on offer are “compelling,” while the second reason is to do with expectations from that market, with Chinese equities having the potential to overdeliver.

“Expectations are undemanding at the stock level, meaning that the odds of beating consensus is higher than for example in the Indian market where almost half of the constituents are trading over 30x next year’s earnings,” Lam said.

While executives don’t have an answer to questions about the catalyst for China’s outperformance, “when the elastic band is at such extremes, it tends to revert and we prefer not to be on the wrong side of that trade. Indeed, our contrarian mindset leads us to overweight China and underweight India, without relying on big macro calls as this is backed by company analysis,” he said.

Lam also acknowledged the “well-known structural and geopolitical challenges facing China, which is why we have a mild overweight, but as the largest weighting in our Asia and EM funds, we expect that some companies will make good money on a three- to five-year view, and there are good entry points on offer.”

Invesco has $1.59 trillion in assets under management.