The relentless selloff in Chinese stocks has made the market the worst performer in the world over the past three years. And that is exactly the reason some funds are looking to unearth pockets of value.

They see a contrarian signal in the extreme pessimism toward Chinese assets in recent months amid an economic slowdown, unpredictable government crackdowns and rolling property woes. Global funds as a whole have slashed their China stock positioning to the lowest since October, which to some means more room for potential buying.

“China has a growth problem today, but not a systemic crisis,” said John Lin, Singapore-based chief investment officer for China equities at AllianceBernstein, which oversees $694 billion globally. “The way you make money is you have to go company by company. There’s a lot of nice cashflow companies, nice dividend-yield companies that are still under-appreciated.”

The MSCI China Index has tumbled 55 percent from a high set in February 2021, while a gauge of mainland firms traded in Hong Kong has slumped 50 percent and is the worst performer of 92 global indexes compiled by Bloomberg over the past three years.

One of the major drivers of the downtrend has been selling by global funds. After making net purchases earlier this year, offshore money managers offloaded a record $12 billion of mainland shares in August via trading links with Hong Kong, and have sold another $3.2 billion this month.

That bearish positioning opens up the prospect of a rebound, while signs of stabilization in parts of the economy mean it makes sense to look for value now, bulls say.

But Where Are The Pockets Of Value?

AllianceBernstein’s Lin says he favors firms in China’s local share market, which is primarily traded by domestic investors.

“We like A shares because they are more domestic oriented, and therefore are less susceptible to capital flows based on geopolitical tensions,” he said. “You can find a lot of interesting stocks that have their own idiosyncratic dynamics.”

For Amundi SA, China’s health-care stocks are where it sees value.

Medical shares have been beaten down amid an anti-corruption clampdown but the sector has probably already reached a bottom with all the bad news in the price, said Nicholas McConway, head of Asia ex-Japan equities at Europe’s largest money manager in London.

Guinness Global Investors favors pharmaceutical names that are transitioning from generic drugs to developing new products themselves or acquiring them through mergers and acquisitions.

Mondrian Investment has been adding to positions in e-commerce giant Alibaba Group Holding Ltd. as its stock price failed to capture the potential payouts that will be distributed to shareholders during its six-way split, said Ginny Chong, head of Chinese equities in London with over 20 years of experience in emerging markets.

She has also been also adding shares of Tencent Holdings Ltd., and sees Baidu Inc. as undervalued.