BEIJING – More and more international investment analysts say it’s time to buy mainland China stocks ahead of the government’s expected support for growth.
In addition to the burden of the pandemic on the economy, the heightened regulatory uncertainty since last summer has generally kept foreign investors wary of Chinese equities.
But in the past few months, things are starting to change for some investment firms.
In its report on global equity strategy for 2022, Credit Suisse updated China to “overweight”, reversing a downgrade in stocks about 12 months ago.
“Monetary policy is eased [in China] while elsewhere it is strengthened, “wrote its global strategist Andrew Garthwaite and his team in the report at the end of January.” The economic momentum is increasing. “
One of the first bright spots on mainland China stocks came from the BlackRock Investment Institute in late September. In early 2022, other companies also made similar calls, while others remain neutral.
On the political front, Credit Suisse expects regulatory uncertainty to subside after a national parliamentary meeting in March and remain muted, at least until after the ruling Chinese Communist Party’s 20th National Congress in the fourth quarter.
Chinese President Xi Jinping is expected to take up an unprecedented third term at the meeting, held every five years to select top government leaders.
During a December 2022 economic planning meeting, Chinese officials stressed the need for stability.
Financial factors, such as the fall in stocks relative to their potential to generate earnings, are also contributing to the positive turnaround by analysts on Chinese stocks.
Bernstein: China is no longer “non-investable”.
In January, Bernstein released a 172-page report titled “Chinese Equities: ‘Uninvestable’ No More”.
“We believe it is appropriate to restore China’s exposure to global portfolios for six key reasons,” said analysts from the investment research firm.
They indicated growth expectations from new loans, a looser monetary policy and more attractive equity valuations than the rest of the world. Other factors included a rare opportunity to pick stocks, growing foreign inflows and higher earnings.
HSBC: Investors too bearish on China
The Shanghai Composite was up 2% from the Lunar New Year holidays, which ran from January 31 to February 6 this year. These gains follow a 7.65% decline in January, the worst month for the index since October 2018, according to data from Wind Information.
“Investors are too bearish on Chinese equities,” HSBC analysts wrote in a February 7 report that stated its October request to upgrade Chinese equities to overweight.
“Yes, China is struggling with growth and a stronger dollar is not good news for Chinese equity markets,” analysts said. “But it is now well known and has a price. Even good blue chip stocks are now trading at attractive valuations.”
The bank’s analysts expect gains of 9.2% this year for the Shanghai Composite and 15.6% for the Shenzhen components index.
Goldman: A shares are now “more investable”
Goldman Sachs expects gains of 16% for the MSCI China Index this year as valuations remain below the Wall Street bank’s target of a price-to-earnings ratio of 14.5, its chief China Equity Strategist said. Kinger Lau in a January 23 report.
On Sunday, Lau and his team released an 89-page report on “Why Chinese A Shares Have Become More Investable for Global Investors”. Their reasoning for investing in the world’s second largest stock market is largely based on greater accessibility for foreign investors and an under-allocation to the share class so far.
A shares are Mainland Chinese companies listed in China, on the Shanghai Stock Exchange or the Shenzhen Stock Exchange.
Goldman Sachs was overweight mainland China stocks in February 2020, during the height of the country’s coronavirus pandemic.
UBS: from “underweight” to “overweight”
In late October, UBS announced it would upgrade Chinese equities to “overweight”, up two levels from an “underweight” call in the summer of 2020.
In another sign of the company’s optimism, the emerging markets strategy team said in January that its most compelling equity ideas include many Chinese internet names such as Alibaba that have been the target of Beijing’s new regulation on alleged monopolistic and data security practices.
Not everyone is a Chinese bull
However, not all international investment firms are so optimistic.
Morgan Stanley’s Asian emerging markets equity strategy team is neutral on mainland China, as are Bank of America and JP Morgan Asset Management.
During the last few years of stimulus, China has not always seen a bull market, Winnie Wu, China equity strategist, BofA Securities, said in a telephone interview. While there are investment opportunities in some industries, corporate earnings growth across China is expected to decelerate.
Wu pointed out that in 2016, despite stimulus expectations, stocks only started to rise after the second quarter. The Shanghai Composite closed down 12.3% that year.
Risks from regulation, real estate market
A sell off of mainland China stocks to date this year reflects how investors have generally remained cautious about Chinese stocks.
Even in updates, companies like BlackRock used conservative language such as becoming “modestly positive” and warned that: “Given the small benchmark weights and typical customer allocation to Chinese assets, the allocation should increase by multiples before represent a bullish bet on China, and even more so for government bonds “.
A sharp drop in Chinese property prices, widespread freezes due to the pandemic and regulatory uncertainty put Credit Suisse’s outlook at risk, Garthwaite said.
China’s pursuit of “common prosperity” – moderate wealth for all rather than just a few – emerged over the summer as the theme of Beijing’s regulatory changes.
Although politics remains “the great unknown,” Garthwaite noted that official remarks – such as Xi’s speech at the World Economic Forum in January – point to an easier position for the future.
“The common prosperity we desire is not egalitarianism … first we will raise the pie and then we will divide it appropriately through reasonable institutional arrangements,” Xi said at the time. “All types of capital can operate in China.”
– CNBC’s Michael Bloom contributed to this report.