Too early to buy China’s favourite stocks as ChiNext’s worst performance in Asia vindicates market bears

  • Kweichow Moutai, Contemporary Amperex Technology and Eve Energy are among the biggest losers this year as key indices slide
  • The main risks for onshore stock market include a potential capital flight from emerging markets as the Fed tightens policy and the US dollar strengthens

China’s most valuable companies have suffered the brunt of selling in trading after Lunar New Year, as the market was among the worst performing in Asia this year, vindicating stock bears who said it was too early to buy the dip.

Kweichow Moutai, the nation’s biggest liquor distiller, has lost almost 1 per cent to extend its slide this year to 8.6 per cent, contributing to an 8 per cent loss in the CSI 300 Index. Battery makers Contemporary Amperex Technology and EVE Energy have tumbled by 12 and 23 per cent each, dragging the ChiNext to a 15 per cent slump.

Companies with rich valuations have lost their mojo elsewhere too, such as the 25 per cent one-day plunge in Facebook owner Meta Platforms, as the Federal Reserve turned hawkish to counter surging inflation. In China, the sell-off has been concentrated in consumer and renewable energy players.

These stocks trade at “above the historical average in valuation and some sectors and companies even trade at record levels”, said Chen Ping, a fund manager at HSBC Jintrust Fund Management in Shanghai. “That is been worrisome to investors. It’s a confluence of headwinds and it’s hard to predict when this correction will end.”

Analysts have cautioned against turning bullish on Chinese stocks too soon, as they wait for more signs of economic stability. Policy easing measures will need to go the distance and revive credit growth before investors plough more money into the market, according to US money manager Thornburg Investment Management.

BCA Research, a Montreal-based firm, said the onshore market faces several major hurdles before it would consider upgrading the market to overweight on the six to 12 months basis, its strategist Sima Jing wrote in a report on Wednesday.

Subdued economic recovery, slowing fiscal impulse, shrinking corporate earnings and the risk of capital outflows from emerging markets amid the Fed’s tightening bias are some of the key risks. The government is also sidetracked by its focus on carbon emissions goals.

“Macro fundamentals indicate that for the time being, there is no basis to overweight Chinese onshore stocks, in both absolute terms and relative to global stocks,” Jing said. Chinese stocks are not much cheaper than their offshore peers, and slower earnings growth later this year offers no downside buffer, she added.

Unless Chinese policymakers go all-in for economic stability and allow a significant credit overshoot, BCA Research will retain its underweight stance on a cyclical basis.

There are optimistic views in the market as investors attempted to pick the bottom after the CSI 300 hit a 16-month low and entered bear territory for the first time since the US-China trade war broke out in 2018, having tumbled at least 20 per cent from the peak in February.

Deutsche Bank and Credit Suisse went overweight on Chinese onshore and offshore shares last month. Strategists at Alpine Macro recommended buying the weakness, saying the downside is “not material” given the ongoing policy reflation and depressed stock valuations.

China has ample room to ease further, which should help stabilise the economic backdrop and support corporate earnings, according to AllianceBernstein. Credit impulse, the change in newly issued credit relative to GDP, “seems close to an inflection point and is on the rise”, it said.

Even with several rounds of liquidity injection and easier borrowing costs since December, markets are waiting for stronger signs of credit expansion, money manager Wang Lei at Thornburg said in an earlier interview with the Post.

While credit growth bottomed last October, it has not shown signs of a strong rebound, according to BCA Research. Corporate demand for credit remains in the doldrums, while turmoil in the housing market has dissuaded households from taking mortgages.

“The real economy, which in previous business cycles lagged credit growth by about six to nine months, has not responded to policy easing measures.”

While China’s A-share market will benefit from policies to stabilise the economy, investors need to be aware of several challenges in store, according to Raymond Jing and Zhang Jun at China Asset Management (Hong Kong) Limited.

“The main risks facing China’s stock market this year are the volatility of the US equity market and the risk of capital outflows from emerging markets as a result of potential interest rate hikes by the Fed,” they said in a 2022 market outlook report.

Authors: Cheryl Heng, Zhang Shidong, SCMP

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