Making a return to global portfolios on bottom bets
Beijing: After multiple false dawns over the past year, some investors are seeing evidence that this rebound in Chinese stocks may be different.

Beijing’s determination to end a rout, signs the economy and earnings are picking up, and a return of foreign inflows are giving investors from abrdn plc to M&G Investment Management reasons to believe that the market is bottoming out.

The shift reflects how investors are coming to terms with China’s attempts to restructure its economy, with some betting that President Xi Jinping’s attempt to drive high-tech growth and end a property crisis will start to bear fruit.

Equity benchmarks have rebounded more than 10% from a February low, a performance that likely shows there were buyers beyond state funds.

“Numerous companies and sectors continue to experience a recovery in revenue and earnings which should help the share prices of these stocks and sectors,” said Nicholas Chui, portfolio manager at Franklin Templeton Emerging Markets Equity. “We also expect sectors other than property to take shape and become stronger over time. This will allow the economy to continue to transition away from property in a sustainable manner.”

The current sentiment marks a sharp improvement from just months ago, when Chinese shares were among the world’s worst performers and some big-name investors were cutting exposure. A steady stream of policy support – from a cut to the mortgage reference rate to more liquidity and crackdown on quants – is stacking up, even though some investors decry the lack of a big-bang stimulus.

The CSI 300 Index of mainland shares has gained nearly 13% since a five-year low reached Feb 2, while the Hang Seng China Enterprises Index has advanced about 15% from mid-January.

Beijing’s resolve to deliver 5% economic growth this year suggests incremental stimulus will continue to flow in, analysts said. Data show the economy is on the mend, with inflation back in positive territory for the first time since August and manufacturing and services no longer in deep slump.

“We expect high single digit or low-teen earnings growth overall this year,” said Nicholas Yeo, head of China equities at abrdn. “We expect deflationary pressure to reduce this year which would provide companies with more pricing power. We are around the bottom of the bottom.”

Xi’s slogan of “high-quality development” – which prioritises sustainable growth from high-tech industries over the debt-driven expansion of the past – is luring early bets from investors, who argue state support will drive industries from electric vehicles to hydrogen power, chipmakers and automation.

Traders are also rewarding better-than-expected earnings more generously. Li Auto Inc and Xinyi Solar Holdings Ltd each jumped the most in years after delivering better-than expected quarterly earnings, a reversal from last year when even positive results failed to boost stocks. The ChiNext Index for China’s growth stocks entered a technical bull market on Monday.

“I think upping your allocation to China probably makes sense now,” Lazard Asset Management’s chief market strategist Ronald Temple said in a Bloomberg TV interview last week. “China could be one of the best performing equity markets as a trade over the next 12 to 18 months.”

Foreign money is trickling back in. A Morgan Stanley analysis shows global long-term investors have taken a pause in selling China, with some funds getting less bearish.

Mainland shares saw 1.8 billion yuan of inflows so far this month. If the trend lasts, it will mark two straight months of net buying after a record six-month streak of outflows through January.

The upward path from here, however, may well be a slow and choppy grind. Deflationary pressure remains high and the external environment challenging with anti-China rhetoric expected to dominate ahead of the November US presidential election. — Bloomberg
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After multiple false dawns over the past year, some investors are seeing evidence that this rebound in Chinese stocks may be different.