(Bloomberg) — As Chinese stocks bottom out after months of selling, investors are sifting through earnings for signs of a sustainable recovery. The early evidence is less than convincing.
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With results released from about a quarter of MSCI China members, they have beaten aggregate expectations by 12%, according to Bloomberg Intelligence. But, a quick cooling in some stock gains after better earnings for companies including Li Auto Inc. points to doubts over corporate resilience.
The earnings reaction reflects the skepticism some have for the country’s 5% economic growth goal, with strategists seemingly in no rush to raise targets for the equity market. The near 13% rebound in the benchmark CSI 300 Index since a February low has helped form a consensus that the battered market has bottomed out — spurring a handful of long-time bears to boost holdings — but it hasn’t led to a material re-rating.
“A sustainable upswing needs more supporting macro data to break the deflation assumption on the Chinese economy and better dynamics in real estate markets,” said Xiadong Bao, a fund manager at Edmond de Rothschild Asset Management. “A cheap valuation is not sufficient to attract investors back given that we are in an election year where US-China geopolitics will be a constant overhang.”
The latest rebound took even Wall Street veterans by surprise, who had set conservative index targets following years of losses. Take Morgan Stanley, for example, whose year-end target for the MSCI China Index stands at 53 — below the current level. Contrast that with the euphoria triggered by the exit of Covid controls in late 2022, when the bank, along with Wall Street peers including Goldman Sachs Group Inc., was quick to raise expectations.
The CSI 300 remains down 38% from a 2021 peak, underscoring the long haul for the benchmark to reclaim its former glory. Whether the rally can extend beyond what some are calling a tactical rebound is under debate.
Read: Chinese Stocks Gain 20% From Lows, Fueling Market Bottom Calls
“Looking ahead, it would require sustainable macroeconomic improvement for China market indices to re-rate,” said Linda Lam, head of equity advisory North Asia at Union Bancaire Privee. “The quarterly result season which is currently underway will be pivotal in regaining investors’ attention in regards to the resilience of Chinese corporates in facing growth slowdown.”
Electric vehicle maker Li Auto jumped 25% in a single session after reporting better-than-expected profit, but share prices have now fallen below its pre-earnings level. Yum China Holdings Inc. and Trip.com Group Ltd., which similarly surged following quarterly results, are close to erasing all of the advance amid concerns over pricing competition and deflationary pressure.
While stock gains have held up for those like JD.com, aggregate forward estimates for MSCI China have steadily declined this year.
Earnings “are not recovering — we have this downward revision which has been there since 2021,” Frank Benzimra, a strategist at Societe Generale SA said in a Bloomberg TV interview this week. “We’re not ready to pull the trigger and take a big overweight position on the market.”
Housing Drag
While the latest data released this week showed that the economy is recovering, the property sector remains a major drag. Housing sales plunged 33% by value in the January-February period from a year ago.
That said, with the MSCI China trading at 9.1 times forward earnings estimates — below its five-year average of 11.9 and emerging market peers’ reading of around 12 — many agree the risk-reward dynamic has turned more supportive.
“We sense an element of normality returning to the Chinese asset markets,” said Gary Dugan, chief investment officer at Dalma Capital Management Ltd. “We are more in the camp of believing that there is further good upside for the equity market as opposed to the risk of being caught in a value trap.”
As investors weigh the market’s outlook, geopolitical risks remain a key overhang that can derail further gains. The woes facing Wuxi AppTec Co., whose share prices have halved this year, illustrate how US-China tensions can hurt earnings outlook and hammer stocks.
“Investing in China in this era should be more of an art, less science, of reading deeply into the direction of geopolitics, central authority’s true intentions and market sentiments – which brings us back to the point that it is nothing like the traditional value investing most are used to,” said Han Piow Liew, the head of equity derivatives at Maitri Asset Management Pte.
–With assistance from Jeanny Yu.
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