China’s commitment to support its market is a first step. Here’s what it takes for a lasting recovery.
China tried to get back into investors’ good graces this week with vague but rare assurances of more market-friendly policies and efforts to stimulate the economy. He acknowledged his crackdown on internet stocks and the property market may have gone too far and pledged to reduce the cost of Covid restrictions.
The far-reaching pledges have hit the right chord to mend investor sentiment, but a sustained recovery from the painful rout in Chinese stocks and the economic crisis will force Beijing to follow through with actions that match its words.
On Wednesday, the minutes of a special meeting of policymakers led by China’s top economic official Liu He included wishes for more market-friendly policies and proactive measures to support the economy. Government officials also left the impression that the crackdown on the internet industry is easing and that implementation would be clearer, addressing one of investors’ biggest fears.
In a nod to the panic that followed last week when the Securities and Exchange Commission began identifying Chinese companies at risk of delisting, policymakers said they backed overseas listings and cryptically said Chinese regulators are making progress on a plan to cooperate with the United States to avoid delisting. .
On Thursday, Beijing turned its attention to fears that China’s tough Covid restrictions could take a heavy toll on its economy as Omicron cases surged. Authorities have said they will seek to contain the outbreak at the lowest cost.
The wave of reinsurance acted as a balm for already cheap stocks which had plunged further last week on delisting fears, with the People’s Bank of China refusing to cut interest rates as some had expected, and the fear that China itself will face devastating sanctions. if he is unable to remain neutral in Russia’s war in Ukraine.
iShares MSCI China
(MCHI) exchange-traded fund and the
KraneShares CSI China Internet
ETF (KWEB) – posted double-digit gains on Wednesday, fell again on Thursday and are sitting on losses of 35% and 61%, respectively, for the past year.
While Beijing may have pulled sentiment out of the abyss and improved the stock pattern, investors need to pick their seats and be clear-headed about China’s challenges in managing its economic slowdown and its delicate balance to support its friends with Russia without being carried away. deeper into a geopolitical imbroglio.
“It looks more like a temporary response to the current weakness,” Julian Evans-Pritchard, senior economist at Capital Economics, said by email. “It would be naive to assume that the political and regulatory headwinds facing the technology and real estate sector have now disappeared.”
After last year’s turmoil, policymakers prioritized stability for months ahead of the 20th Party Congress, when President Xi Jinping is expected to take a third term, a reason Barrons in January, said Chinese stocks could be poised for a rally.
But it’s not easy: “The remarks were important to set the tone: that this is not a return to Maoism, but it doesn’t change the main issues that drive Chinese actions,” says Michael Kelly, global head multi-asset strategies. at PineBridge Investments, which oversees nearly $149 billion and adds that it’s also unclear where politics will head after Xi is crowned for life.
For now, there is little change in Beijing’s core priorities, several of which could contribute to an erosion of margins. That includes his efforts to tackle inequality in part by pushing corporations to support social good and by creating a level playing field for business, Kelly said. Another concern: the slowdown in the Chinese economy. Joyce Chang, Global Research Chair for
says the first thing investors will look to is economic data to see if it supports a recovery or has been compromised 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 come in the form of interest rate cuts and more muscular support for the housing market. It adds to Chinese equities, particularly Macau’s gaming and travel stocks which should benefit from any easing of China’s Covid policies and possible reopening.
GQG Partners Chairman Rajiv Jain favors cyclical stocks like
China Merchants Bank
(3968: Hong Kong), which should benefit from increased government spending and loan growth as the economy recovers.
The internet giants at the center of last year’s rout are poised for a rebound, with value managers like Ginny Chong, head of China equities at Mondrian Investment Partners, drawn to dominant companies that trade at deep discounts, like
Alibaba Holding Group
(BABA), which lost half of its market value,
(ATHM), which at its lows was trading less than its cash.
Some of these companies face challenges that could limit benefits, including regulation that hampers promising areas like fintech and ongoing data security scrutiny. Instead of going for the previous multiples of 20 times earnings, valuations could approach the average tens, some managers say. At 9 times Alibaba’s forward earnings, this is still an advantage, although it may come with volatility.
Still, if U.S. and Chinese regulators reach a compromise to avoid mass delistings, internet stocks would be among the biggest beneficiaries. But so far the SEC has not reciprocated China’s more dovish tone, and fund managers say they still prefer the Hong Kong-listed versions of these stocks given China’s efforts. to reduce its dependence on the United States. The SEC did not immediately respond to a request for comment.
Even greater political risks loom. Congress is debating a bill that would review overseas investment, which could hurt long-term investment prospects for China, and the threat of punishment looms. President Joe Biden and Xi are expected to speak on Friday. If China confirms that it will not offer a lifeline to Russia, it could help unfreeze US-China relations, providing further impetus to short-term stocks.
“Equities have triggered a sell policy but will remain very volatile; it’s still a stock picker’s market,” says Rory Green, chief China economist at TS Lombard.
As one fund manager who was watching Chinese stocks pointed out: China is not for the faint-hearted, but starting to search among the recent wrecks could be fruitful.
Corrections & Amplifications
Joyce Chang is president of global research for JPMorgan. An earlier version of this article incorrectly identified her as the company’s global head of research.
Write to Reshma Kapadia at [email protected]