(Bloomberg) — Investors in Chinese stocks are losing patience as a long-awaited earnings recovery fails to materialize and a rally collapses.
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Profit estimates based on key Chinese indicators have been cut sharply in Asia this year, as a deepening property crisis and weak retail sales have hurt confidence. Stocks lost momentum after peaking in mid-May, with the MSCI China index down more than 8%.
“We have seen 11 consecutive quarters of missing results for MSCI China and the analyst consensus has not really taken into account the weakness of the underlying growth environment in China,” said Jonathan Garner, chief strategist stocks in Asia at Morgan Stanley. said Thursday. “You have to be selective to get involved in China. There is also more competition, especially in sectors like e-commerce.”
Optimism about improving corporate performance was at the heart of a months-long bull run earlier this year, with global funds tiptoeing back into the world’s second-largest stock market. The recent decline brings back dark memories of years past, when rebounds were quickly overshadowed by selloffs as risks from geopolitical tensions and regulatory crackdown resurfaced.
The Shanghai Composite Index and the CSI 300 Index have each seen their consensus earnings estimates fall more than 6% this year, compared with a 1.6% increase for the MSCI Asia Index and even higher rises for benchmarks in India and Japan, the data showed. compiled by Bloomberg.
Earnings results for members of the MSCI China index missed the overall estimate by about 3.5 percent in the first three months of the year, while those for domestic stocks showed a similar trend, according to a other dataset.
As the recovery falters, foreigners are starting to sell again. Foreign investors sold domestic stocks for nine straight days through Thursday, offloading the equivalent of more than $5 billion in the longest sell-off since August 2023.
Investors are returning to “a wait-and-see approach as allocations dip again into underweight territory,” according to the latest survey of Asian fund managers by Bank of America Corp. a structural decline against the asset class,” strategists including Ritesh Samadhiya wrote in a June 18 report.
The survey showed that fund managers are significantly underweight Chinese stocks by 6%, down from a neutral position in May.
Although Chinese investors are accustomed to the ups and downs of the market, some are betting that this time the situation would be different since Beijing has launched a series of market support policies, including a real estate bailout plan. That support, along with earnings recovery hopes, helped attract rare buying calls from strategists at UBS Group AG and Société Générale SA, and prompted a turnaround from fund managers formerly bearish, including veteran Mark Mobius.
As the slide continues, with the CSI 300 index down for a fifth week, doubts resurface. Added to the concerns is the weakness of the data. Chinese property prices fell at a faster pace in May, and the country’s biggest internet companies are resorting to massive discounts to attract customers during the “618” shopping festival.
In its portfolio update in late May, T. Rowe Price overweighted emerging market stocks excluding China, but maintained its underweight to that country, saying stimulus measures so far are too incremental to revive the market.
Optimists are pinning their hopes on July’s third plenum, one of the country’s most important political events, where top leaders outline long-term economic goals and telegraph policy changes. The MSCI China Index “will trade better through July and August,” Wendy Liu, an equity strategist at JPMorgan Chase & Co, wrote this week. She cited the third plenum and continued buybacks among the reasons.
The risk is that if the results of the third plenum are disappointing, the prevailing view on Chinese stocks could become decidedly pessimistic due to the lack of catalysts.
What analysts expect to achieve in earnings over the next two years “can only be a miracle,” Alexander Redman, CLSA’s chief equity strategist, said in a press briefing at Jakarta earlier this month. Investors should maintain their benchmark weighting in Chinese stocks as their consensus earnings estimates appear too optimistic, he added.
–With help from Ivy Chok, John Cheng and April Ma.
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