Chinese stocks near end of capitulation find few takers as foreigners dump, confidence ebbs

• By some yardsticks, Chinese stocks are oversold and may be approaching the end of capitulation after a US2.4 trillion sell-off this year
• But weak sentiment will continue to dog the market as headwinds such as the threat of US sanctions and slower corporate earnings remain, according to China Renaissance

Going by some yardsticks, Chinese stocks are oversold and may be approaching the end of capitulation after a US2.4 trillion sell-off in Hong Kong and mainland bourses this year.

MSCI China, the broadest measure of local markets, is trading at the lowest price-earnings multiple since mid-2013 excluding banks, according to Goldman Sachs. The Hang Seng Index’s 66 members are trading at a record 13 per cent discount to book value, according to Bloomberg data.

Crucially, top Beijing officials have stepped in to calm nerves, while stock buybacks of late, from the likes of Alibaba Group Holding and Xiaomi, have gained momentum in attempts to put a floor under stock prices.

Yet, confidence remains in short supply. The threats of US sanctions and delisting from American exchanges, as well as slower corporate earnings, have become bothersome. Foreign investors have hastened their retreat, with US$10 billion net-selling of onshore stocks this year.

“Sentiment is still the major driver of market performance,” said Bruce Pang, head of macro and strategy research at China Renaissance Securities. “Valuations do not seem to matter as much now. It may be too early to say where the floor level or bottom of the market is, or even difficult to confirm any signal of bottoming.”

Stocks in Hong Kong slipped on Friday, erasing gains accumulated during the week, while foreign investors withdrew US$2 billion from mainland bourses. Among major Asia-Pacific markets, the Hang Seng Index was the worst performer, after the Shanghai Composite Index.

Pang’s caution is centred on an ongoing impasse between China and the US audit watchdog PCAOB. The agency suggested it was still unclear if China would grant it full access. China’s stance on Russia’s invasion of Ukraine, Covid-19 lockdown and property market slowdown, are also worrying investors, according to Montreal-based BCA Research.

“The relevant question for investors is whether the events of the last several weeks represent a final capitulation in Chinese stocks, creating a buying opportunity,” said Arthur Budaghyan, chief emerging markets strategist at BCA. “Unless global stocks have bottomed (which is not our view), it will be difficult for Chinese share prices to rally on a sustainable basis.”

Like recent bullish views from analysts at China International Capital Corp and HSBC, Budaghyan is telling investors to resist the temptation of becoming more bearish on Chinese value (non-tech) stocks as their prices fall to near their lowest in 12 years.

“Their risk-reward in relative terms to other [emerging] markets has improved due to the capitulation sell-off, and authorities’ increased willingness to stimulate the economy more aggressively going forward,” he said in a report on March 24.

Chinese stocks are “still on sale,” analysts at Goldman Sachs said, with policy “circuit breaker” in the form of state support setting a floor on valuation downside. The plus factors, such as policy easing, a favorable political cycle, moderating regulation intensity, inexpensive valuations, and light positioning, are still valid.

“However, the geopolitical shocks centering on Ukraine-Russia had significantly pressured Chinese stocks via various direct and spillover channels, driving valuations to historical lows,” they added in a March 27 report.

Hong Kong’s market has recovered about US$780 billion in market cap since recovering from a decade-low on March 15. The rebound has given way to concerns about recent earnings reports, as the likes of Alibaba, the owner of this newspaper, and Tencent Holdings disappointed.

About 48 per cent of China listed companies have issued their report cards, trailing 2021 consensus by 4 percentage points, according to data compiled by Goldman Sachs. Stocks may not look as cheap, with analysts likely to extend a 2 per cent cut in earnings projections this month, according to UBS.

“More earnings downgrades may be coming due to elevated commodity prices, which could hamper near-term share market performance,” said James Wang, head of China equity strategy at the Swiss investment bank.

Weak sentiment will continue to dog the market in the near term, as none of the headwinds has significantly eased, according to Pang at China Renaissance.

“Only when negative factors such as macro slowdown, regulatory crackdown, policy overhang and geopolitical risks are fading, can sentiment and confidence be solidified,” he said. “The volatility may last for months.”

Author: Zhang Shidong, SCMP