Michael Burry Views Hong Kong Stocks as Undervalued Amid Cooling in the AI Sector

Original author: Zhao Ying

Source: Wall Street Journal

A long-short battle, led by Michael Burry, is unfolding in the Hong Kong stock market, with bullish voices continuing to gather.

Michael Burry, the investor who gained fame for accurately predicting the 2008 U.S. subprime mortgage crisis and whose story was adapted into the film "The Big Short," recently stated that now is an "excellent time" to look for undervalued stocks in the Hong Kong market. His bullish rationale is based on the expectation that the global AI chip stock rally is cooling, leading capital to flow out of South Korea, Japan, and the semiconductor sector in search of valuation discounts.

Meanwhile, Wang Yajun, Head of Asian Equity Capital Markets at Goldman Sachs, also noted that the Hong Kong market has effectively entered the AI era, although this reality has not yet been reflected in the major indices.

Both perspectives, from different angles, point to the same conclusion: there is a significant disconnect between Hong Kong stocks' current sluggish performance and the underlying vitality of the market—this very disconnect may represent an investment opportunity. For investors seeking undervalued assets, the appeal of Hong Kong stocks is growing.

Michael Burry, founder of Scion Asset Management, posted on X on July 17: "Now is an excellent time to look for undervalued Hong Kong stocks, which should perform well after the shine fades from Korea, Japan, and SOXX (the semiconductor ETF)."

Burry's statement comes against a market backdrop. Global chip stocks have recently faced large-scale selling, as concerns grow over whether AI companies can translate technological investments into actual profits, compounded by high capital expenditure pressures, putting pressure on the semiconductor sector, which had previously led global markets. In contrast, Hong Kong stocks have declined this year, making their valuations relatively more attractive.

Notably, Burry has already taken action earlier this month—according to Bloomberg, he increased his stake in the Chinese e-commerce company JD.com and established new positions in DraftKings and Flutter, demonstrating that his bullish stance on Hong Kong stocks and related Chinese overseas-listed equities is not merely rhetorical.

At the data level, the relative weakness of Hong Kong stocks is clear. The Hang Seng Index has declined by approximately 7% year-to-date, while the Hang Seng Tech Index has fallen even further by 15.22%, primarily due to weak consumer spending and insufficient market confidence in the prospects of China’s e-commerce sector.

This stands in stark contrast to the strong performance of other major global markets. According to Bloomberg data, South Korea’s benchmark index has surged 62% year-to-date, driven by strong performances from two major chip giants; Japan’s Nikkei 225 has risen 26%; and the iShares SOXX ETF, which tracks the semiconductor sector, has skyrocketed 76%.

It is precisely this significant underperformance that leads Burry to believe Hong Kong stocks are now in a position to "buy the dip"—when global capital begins to reassess the sustainability of the AI boom, previously overlooked Hong Kong stocks may see a catch-up rally.

Goldman Sachs' perspective offers another dimension of interpretation—Hong Kong stock market's weakness is, to some extent, an "illusion" caused by structural lag in the index.

Wang Yajun, Head of Equity Capital Markets for Goldman Sachs Asia (excluding Japan), stated at a recent media event that the Hong Kong market has entered the AI era, but the major stock indices have yet to reflect this reality—this is the fundamental reason behind the stark contrast between the booming IPO market and the sluggish index performance.

Wang Yajun noted that this year, AI has been the most active topic in the Hong Kong stock market, with AI-related stocks leading in trading volume, performance, and fundraising. However, the adjustment of index components requires considerable time, resulting in a mismatch between the index and the market’s true landscape. He expects that the total equity fundraising in Hong Kong this year could reach a record high, with full-year IPO fundraising surpassing the 2021 historical peak, and additional AI companies are expected to list in Hong Kong in the second half of the year.

In terms of fundamental analysis, Wang Yajun believes that capital expenditures by AI companies will continue to be supported by growing end-demand, providing a foundation for the long-term performance of related sectors.

Burry is not alone. According to Bloomberg, Morgan Stanley has also recently urged investors to buy Hong Kong stocks, citing optimism about corporate earnings prospects and believing the impact of lock-up expirations will be relatively limited.

However, the bullish case for Hong Kong stocks is not without challenges. This year’s decline in the Hang Seng Index reflects ongoing market concerns about the pace of China’s consumer recovery and the profitability of the e-commerce sector—structural pressures that are unlikely to fully dissipate in the short term. As Goldman Sachs’ Wang Yajun described, the “mismatch between index and market” means that retail investors relying solely on the index as a benchmark may both underestimate the structural opportunities within Hong Kong stocks and overlook the continued pressures facing traditional weighted constituents.

For investors, Burry’s bottom-fishing signal and Goldman Sachs’ AI narrative together paint a picture of opportunities in the Hong Kong market, but how to precisely position oneself amid overall index pressure and structural highlights remains the central challenge before the market.