Chinese officials launched a flurry of reinsurance last week to calm investors after a scrapping of Chinese stocks got even uglier. While commitments to support the market and the economy have put a cap on inventories for now, a lasting recovery will require authorities to follow through on their vague talk with action and continue to stay out of Russia’s war in Ukraine.
Authorities have acknowledged that their crackdown on internet and housing stocks may have gone too far, while their efforts to help the economy haven’t gone far enough.
Policy makers indicated that the crackdown on Internet companies would “soon” be over. They have also opened the door to loosening stiff Covid restrictions as a spike in Omicron cases has forced cities like Shenzhen to close.
The comments offered a potion to troubled markets, with Chinese equities reaching record double-digit one-day gains. Internet titles were among the biggest winners. The rebound comes out of depressed levels, with the
Invesco Golden Dragon China
exchange traded fund (ticker: PGJ) of shares listed in the United States which has lost nearly two-thirds of its value since its peak last February. Even the widest
iShares MSCI China
The ETF (MCHI) and the KraneShares CSI China Internet ETF (KWEB), two popular methods for playing a short-term rebound, are posting losses of 35% and 62% respectively over the past year.
As Beijing has pulled sentiment out of the abyss, investors need to pick their seats and be clear about China’s challenges in handling its economic slowdown and its delicate balance of supporting Russia without being dragged deeper into a geopolitical scam. . They will also need time to see if the reassurances mark a reassessment of President Xi Jinping’s reforms or if they are just a pause until things calm down.
“It feels more like a temporary response to the current weakness,” Julian Evans-Pritchard, a senior Chinese economist at Capital Economics, says via email. “It would be naïve to assume that the policies and regulatory headwinds facing the tech and real estate sector are now gone.”
After the turmoil last year, policymakers prioritized stability for months before the 20th Party Congress, when Xi is expected to take a third term, a reason by Barron he said in January that Chinese equities could be prepared for a turnaround.
But it’s not all smooth: “The remarks were important to set the tone: that it doesn’t go back to Maoism, but it doesn’t change the main problems driving Chinese equities,” says Michael Kelly, global head of multi-asset strategies at PineBridge. Investments, which oversees nearly $ 149 billion and adds it’s not even clear where the policy will go after Xi is anointed for life.
For now, there is little change in Beijing’s core priorities, many of which could contribute to margin erosion. This includes his efforts to address inequality in part by pushing companies to advocate for social good and creating a level playing field for companies, says Kelly. Also a concern: the slowdown in the Chinese economy. Joyce Chang, president of global research for
JP Morgan, says the first thing investors will turn to is economic data to see if they support a recovery or have been jeopardized by Omicron.
The feeling of well-being cannot be dismissed in the short term. Louis Lau, co-manager of the Brandes Emerging Markets Value fund, says policy follow-up must take the form of interest rate cuts and stronger support for the housing market. He is adding to Chinese equities, especially Macau gaming and travel titles, which should benefit from easing China’s Covid policies and eventual reopening.
Others like GQG Partners President Rajiv Jain prefer cyclicals like
Chinese business bank (3968: Hong Kong), which will benefit from rising government spending and lending growth as the economy picks up, in the internet sector, where once promising firms such as fintech have been hindered by regulation and competition has is intensified. Some of these changes could mean that internet powerhouses catch up with lower multiples, perhaps in the lower-middle age group compared to multiples in the 1920s before the crackdown.
Improving sentiment means Internet giants at the center of last year’s rout, like
Alibaba Holding Group (BABA) – are ready to take advantage of it, says Ginny Chong, head of Chinese equities at Mondrian Investment Partners. In addition to Alibaba, which with 12x forward earnings, trades at less than half its peak multiple in 2020, Chong has gravitated to other heavily discounted internet companies such as
Tencent Holdings (700.Hong Kong),
Baidu (BIDU) e
Self-home (ATHM), which she believes already reflects many of investors’ concerns.
However, if US and Chinese regulators compromise to avoid mass delisting, internet stocks would be among the biggest beneficiaries. But so far the SEC hasn’t returned China’s more conciliatory tone, and financial managers say they still prefer Hong Kong-listed versions of these shares given China’s push to reduce its dependence on the U.S. SEC did not respond to a request comment.
The greatest risk remains geopolitics. China continues to walk a fine line between aligning publicly with its ideological friend, Russia, while trying not to conflict with Western sanctions. President Joe Biden in a two-hour video conference with Xi on Friday stressed the consequences of China providing material support to Russia in Ukraine, while Xi noted that the conflict and confrontation were in no one’s interest.
If China’s tone changes and decides to lend more support to Russia, investors may have to rethink whether China isn’t investable after all.
“The stocks triggered a put policy but will remain highly volatile; this is still a stock picking market, ”says Rory Green, Chinese chief economist at TS Lombard.
As another financial manager observing Chinese equities points out: China is not for the faint of heart, but the short-term setup for stock pickers is improving, as long as geopolitics doesn’t get in the way.
Corrections and amplifications
Joyce Chang is president of global research for JPMorgan. An earlier version of this article incorrectly identified her as the head of global research for the company.
Write to Reshma Kapadia at firstname.lastname@example.org