Why some strategists think it’s time to dive back into Chinese stocks

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The dark clouds hanging over Chinese stocks are starting to lift, leading some strategists to say valuations look attractive.

Isaac Lawrene/AFP via Getty Images

Some investors didn’t want to go back on Chinese stocks even though they are cheap. But that’s starting to change as some of the darkest clouds hanging over the market show glimmers of parting, including in the hard-hit tech sector.

There is no watering down of risks. Questions linger over whether Beijing will be able to stabilize its struggling economy and heal its struggling real estate sector, especially as it sticks to its Zero Covid policy. There is a question about what will come out of the 20e Party Congress when the Communist Party chooses its leadership this fall and President Xi Jinping is expected to win a third term. What that might mean for US-China tensions, Taiwan and other human rights and national security concerns is unclear.

But some of investors’ biggest near-term worries are starting to ease, especially as policymakers take more action to suggest the tech crackdown that has rocked the sector may be coming to an end. Indeed, battered internet stocks hit a three-month high, with the

KraneShares CSI China Internet

exchange-traded fund (ticker: KWEB), up 6% on Wednesday as China approved the first big bundle of video games since it limited minors to just three hours of online play last summer.

Other signs have also emerged that policymakers want to stabilize Chinese stocks, including

Alibaba Holding Group

(BABA) announcing the largest takeover in the country, wrote Louis Gave of Gavekal Research in a note to clients.

With Chinese stocks down 50% or more from highs last February,

JP Morgan

strategists this week said many of the risks are in the price. “We were cautious on China last year and until recently this year, but believe the risk-reward ratio is finally improving,” the strategists said in a note. They said the number of Covid cases was stabilizing, a turning point in what they describe as a credit boost and more stimulus to come – and a shift in China’s policy from restrictive to seeking stability.

Chinese policymakers clearly intend to step up fiscal and monetary stimulus, with JPMorgan strategists noting that China has only missed its growth targets twice. Economists are skeptical China can meet its 5.5% economic growth target for this year, but policymakers are expected to pull out all the stops, which should act as a catalyst for Chinese stocks. The

iShares MSCI China

(MCHI) ETF is up 3% on Wednesday at $55.77 but still down 35% over the past year.

The easing of Covid-related lockdowns that had crippled metropolitan Shanghai offers another catalyst, with the economic damage wrecked by policymakers’ efforts to contain resulting in a rare public separation of views between Xi and Premier Li Keqiang.

Even Beijing’s focus on common prosperity, which has raised concerns that companies may need to sacrifice profits to do more in government service, could be downplayed, Gave noting that calls for common prosperity have not been accompanied by real action – beyond the backlash against China’s biggest internet titansincluding Alibaba’s Jack Ma.

Much of where Chinese equities go next depends on politics – one reason why the 20e Party Congress in the fall will be a milestone for long-term investors. If Xi wins a third term but faces a clearly named successor, Gave says markets would likely applaud the outcome as it would suggest internal Party checks and balances have defeated Xi’s attempts at one-man rule. If Xi consolidates power without a clear successor, Gave says it would increase China’s political risks domestically and internationally, leaving markets “perplexed”.

“If the coming months see China turn its back on lockdowns, one-man rule and tech repression, opting instead to boost its domestic economy while also benefiting from increased commodity trade with Russia, then many conditions would have come together to push Chinese stock markets — and optimism about the broader emerging market space — much higher,” Gave said.

Although the focus is primarily on internet stocks such as Alibaba and

Tencent Holdings

(700.Hong Kong), which have been beaten and are expected to rebound in the near term, some fund managers favor other parts of the market more tied to Chinese policy objectives.

In a note to Goldman Sachs clients, Asia-Pacific strategist Alvin So favors stocks in China that can benefit from the global climate change initiative and the Chinese government’s support for emerging industries and technologies. He said valuations have fallen over the past year, creating attractive opportunities at companies like the chipmaker.

LONGI Green Power Technology

(601012.China), electronic component manufacturers

Luxshares Precision Industry

(002475.China), and

BOE Technology Group

(000725.China) and industrial machinery company

Shenzhen Inovance Technology


Write to Reshma Kapadia at [email protected]

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