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Bargain hunters relish chance to buy cheap Hong Kong stocks

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[HONG KONG] Even as Hong Kong stocks tumble, some investors are having a hard time turning down what they see to be a good deal.

Bargain hunters are braving the uncertain outlook in Hong Kong for opportunities to buy stocks on the cheap. The Hang Seng Index fell 1.6 per cent on Thursday, trading at just 10 times projected earnings, with about half of its members setting new four-week lows. Shares of commercial landlords like Wharf Real Estate Investment or Link Reit have fallen at least 19 per cent from their peaks this year.

The Hang Seng Index rebounded 0.6 per cent at 9:58am local time on Friday.

Headwinds for Hong Kong assets include protests that are nowhere near resolution, with tension increasing after the US Senate passed a bill supporting the city's demonstrators. That's drawn the ire of China, and threatens to derail any progress made on trade. But for VC Asset Management's Louis Tse, the moment to buy is now.

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"When the Hang Seng Index fell almost 600 points in the morning, I thought ‘That's it. I can buy now'," said Mr Tse of Thursday's drop. "You don't often see good companies falling this much. There are opportunities."

Among Mr Tse's top picks is the city's subway operator MTR Corp, which is down 22 per cent since this year's peak as footfall slumped after its stations were damaged and services suspended. Others on Mr Tse's shopping list are Wharf Real Estate - which operates a mall near a protest zone - and Link Reit. The former will recover when shoppers inevitably return, he says, while the latter can rely on its exposure to the mainland.

To Joanne Lim, algorithmic and portfolio trader at Sanford C Bernstein & Co, a further drop in shares of Macau casinos will create a good buying opportunity. She sees improvements in local transportation infrastructure bringing in more customers in the long-term, especially high-spending visitors from China.

"Current valuations in the gaming sector are pretty attractive, if investors can ride the volatility," Ms Lim said.

Wynn Macau added 1.2 per cent on Friday, narrowing its loss since April to 26 per cent. Sands China gained 0.8 per cent.

Making life more difficult for Hong Kong stock pickers is the surge in correlation. The degree to which Hang Seng Index companies move in lockstep has risen to the highest since May, meaning shares are more likely to take their cues from headlines around trade or protests than company-specific news. Six-month realized correlation is far higher in the city than in the US, Europe or Japan.

Some stock investors prefer to shop elsewhere due to the uncertain outlook.

"Hong Kong stocks are cheap, but there is the opportunity cost as well," said Wang Yugang, fund manager at Beijing Axe Asset Management. "We don't see things taking a turn for the better, and it would be a waste of time just letting money sit in Hong Kong."

Justin Tang disagrees. The head of Asian research at United First Partners is eyeing Wharf Holdings and Swire Pacific, because of their diversified investments. Mr Tang's team recently traveled to Hong Kong from Australia to see the situation on the ground.

"Now is a great time for a very experienced stock picker," he said. "There are a lot of opportunities in the Hong Kong stock market right now."

BLOOMBERG