(Bloomberg Opinion) — Confidence is low among Chinese investors these days, confounding analysts who say the reasons to own the market are finally coming to fruition.
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MSCI China Index valuations are declining and 12-month rolling returns are negative, a sign that investors are pricing in an earnings squeeze. Recession-proof trading is picking up steam, with a defensive strategy of buying dividend payers suddenly among the year’s top performers.
Investor pessimism, worsened by US tensions, has become so entrenched that it is suppressing prices when improving fundamentals may justify a move higher. MSCI China trailed nearly all other global benchmarks in April, even after economic data topped estimates since 2006 and global banks raised their earnings growth forecasts.
“There is a clear negative bias right now,” Winnie Wu, China equity strategist at Bank of America Corp., said by phone. “There is a feeling that China’s post-Covid recovery needs a longer track record. The problem is that a lot of people don’t have the patience to commit now and wait.”
Analysts are calling for an average 22% increase in operating income for MSCI China companies, the fastest growth since 2011. But investors are still selling: Tech stocks are in a bear market and charts are forming ominous indicators. Mainland Chinese and Hong Kong stocks lost a combined $866 billion in just over a week, a faster selloff than during the October capitulation.
Fears of what China would look like under the full control of President Xi Jinping led to a massive sell-off after the party Congress in October. While investors returned after Beijing removed Covid controls and vowed to prioritize growth, the selloff may now reflect continued anger over a government that cracked down on the country’s most profitable companies at the expense of the economy and investors. .
Market watchers see several reasons for the deterioration in sentiment. Most say tensions with the US are spooking international funds, while some blame divestments by celebrity investors or longtime Chinese corporate pundits. Others attribute it to skepticism about the recovery of consumption.
Mixo Das, Asia equity strategist at JPMorgan Chase & Co., says investors will soon run out of reasons to avoid holding Chinese stocks, with low multiples and better earnings driving prices higher. MSCI China is trading at just 7.6 times expected operating profit, 9% cheaper than averages going back nearly two decades. The multiple is 34% lower than the MSCI All-Country World Index and 45% below the valuation of the S&P 500.
Such discounts are typical during periods of acute stress, such as the 2020 Wuhan lockdown, the 2018 trade war, the 2016 hard-landing era, and the 2015 stock bubble burst. find someone bearish enough. to predict a collapse in China’s economy or financial system at this time.
Morgan Stanley’s Asia-based strategy team, known for advising against dip buying during stock sell-offs in 2021 and 2022, has just reiterated its bullish call on China as it expects better growth and improving relations with allies. key economics. For abrdn, the pullback is a “good opportunity for long-term investors” to access stocks related to the reopening, according to Pruksa Iamthongthong, senior director of Asian stock investment.
That does not mean that everyone is optimistic, far from it. Pilar Gomez-Bravo, co-head of global fixed income investment at MFS Investment in London, says it’s not yet clear whether the jump in activity in March was distorted by the sudden reopening or a reflection of real demand.
“The People’s Bank of China is saying: don’t worry, we are going through this reopening path and we are confident that we will control it,” said Gómez-Bravo, whose team is underappreciated in the Chinese government. bonds and cutting its exposure to high-yield real estate. “But unless you have a clearer picture, it’s too soon for conviction.”
Much of the driving force behind global flows into Chinese stocks comes from geopolitics. Headlines about China’s stance on European countries and the war in Ukraine, military exercises near Taiwan, or the Biden administration’s restrictions on key technologies add to market jitters.
“It scares a lot of institutional investors who would normally be willing to invest a lot of money in China,” said Mark Mobius, co-founder of Mobius Capital Partners. “It’s a real problem.”
Another key risk is: what if the gloomy market outlook on the economy turns out to be correct in a few months? Asian funds, which unlike their US counterparts gave an overweight to China during the reopening of trade, are now trimming their exposure. Selling by long-only global investors has sapped China’s liquidity markets because onshore investors have yet to close the gap, according to Wu at BofA.
“People are reluctant to be positive; this is a bit natural after a long down cycle,” said JPMorgan’s Das. “The evidence is already there. The remaining bit is time.
“With the help of Abhishek Vishnoi.
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