After US$1.9 trillion rout, Chinese stocks may have seen the worst, Standard Chartered’s CIO says

  • Valuation of Chinese stocks at deepest discount in 20 years relative to global peers, says Lam at Standard Chartered’s wealth management unit
  • Wild swings may be ending while economic and market risks are manageable, UBS CIO Office says

Chinese stocks are likely to outperform global peers over the next 12 months as investors have probably seen the worst of the sell-off after a US$1.4 trillion rout in MSCI China Index this year, according to Standard Chartered.

Cheap valuations and further policy easing will support stock prices even as risks to China’s economic growth multiply amid sporadic Covid-19 lockdowns and accelerating global inflation. That call resonates with strategists at Goldman Sachs, who predict a 23 to 29 per cent upside for 2022.

“We may have seen the worst in Chinese equities this year,” Daniel Lam, a senior cross-asset strategist at Standard Chartered’s Chief Investment Office in Hong Kong, wrote in a report on Friday. “Chinese authorities will continue to ease monetary policy and step up fiscal stimulus in order to hit its ambitious GDP growth target.”

The bank favours stocks in the energy, financials, and industrial sectors, saying there is room to catch up with the rise in oil prices, easing credit concerns and the state policy to shore up high-end manufacturing. Policy tightening in the developed economies could spur rotation into Chinese equities, Lam added.

The MSCI China Index, which tracks 738 stocks, fell 14 per cent last quarter, adding to a 21.6 per cent slump in 2021. A tech-sector crackdown, coupled with delisting risks involving Chinese companies traded in the US and worries about “secondary sanctions” related to Russia’s invasion of Ukraine, combined to knock US$1.9 trillion of market value from the index members in the 15-month period.

The sell-off has driven the index’s forward price-earnings multiple to 11.1 times at the end of February, versus 17.4 times for the MSCI World Index. That put the discount on Chinese stocks relative to global peers at the deepest in about 20 years, Lam said.

Chinese stocks saw one of the wildest swings in recent memory, as some analysts called the market “uninvestable.” The Hang Seng Index in Hong Kong crashed from 22,000 points to 18,000 in mid-March, only to recover all and more – a 40 per cent round-trip within days.

Analysts at TS Lombard said China’s broad easing may not be a prelude to a market turnaround. The firm, which stays neutral on Chinese equities, said structural headwinds have not subsided, while risks to growth are growing.

“China is stuck between a rock and a hard place as rising Covid and property sector headwinds are offsetting the impact of increased stimulus efforts,” Andrea Cicione, who heads research at the London-based firm, said in a note published last week.

“Growth-negative common prosperity goals of property sector deflation and Big Tech regulation have been dropped for now, but they remain long-term priorities and will weigh on secular growth,” Cicione added.

For UBS Chief Investment Office, the roller-coaster ride for investors may be nearing an end after the recent market pullback. The firm said economic and market risks are manageable.

“Such depressed levels do not sync with the recovering economic outlook [or] the fundamental earnings growth prospects of Chinese companies,” the firm said in a note published last week.

Covid-induced lockdowns are less severe than in 2020, and are unlikely to be prolonged, it added.

Author: Cheryl Heng, SCMP

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