Analysts turn bullish on China stocks, which now look 'enticingly attractive'
09 January, 2023
Chinese stocks are poised for a turnaround in 2023, said market observers, citing attractive valuations and a long-awaited reopening that may lift the world’s second-largest economy out of COVID-19 woes.
Optimism has led Chinese equities higher in the first trading week of the year, with both the benchmark Shanghai Composite Index and the blue-chip CSI 300 Index adding about 3 per cent for the week.
China’s zero-COVID regime – resulting in extensive lockdowns of major cities that disrupted daily lives and economic activities – has been a major factor weighing on its stock markets, which raked up torrid double-digit declines last year.
Markets also felt the chill in the country’s property sector, which is in a slump following a two-year-long crackdown by authorities to rein in debt and speculation. The loss in investors’ confidence has had a knock-on impact on other sectors as well such as banks, said IG’s market strategist Yeap Jun Rong.
These headwinds were accompanied by global uncertainties, ranging from rapid interest rate hikes to geopolitics.
“Internationally, the outflows due to rising US-China rate differential and concerns about geopolitical tensions, such as the Ukraine war and US-China tensions, added to the (market’s) fragile sentiment,” said OCBC Bank’s head of Greater China research Tommy Xie. China began unwinding its stringent pandemic restrictions last month, first doing away with mandatory testing and lockdowns before announcing that it would scrap quarantine requirements for overseas arrivals.
Chinese stocks have cheered the policy changes, rallying about 40 per cent from its troughs, DBS’ chief investment officer Hou Wey Fook told reporters at an outlook presentation last week.
“A period of consolidation is not unexpected after such a strong rebound, but we are convinced that the market bottom of October 2022 is in place,” he said, adding that the three criteria for a “sustainable” turnaround in the Chinese equities are finally in place.
The first is attractive valuations, which has been the case since last year. The other two criteria are clarity on US-China tensions and catalysts in terms of policy support.
“While the undercurrent between US and China will remain for a long while, it is encouraging to see some degree of de-escalation of rhetoric and some degree of rationality in relation to the understanding of the balance between strategic competition and collaboration,” said Mr Hou.
“On catalysts, we are now seeing a full-fledged reopening of the economy, as well as the government's proactive support measures for its property sector.
“With the three (criteria) in place, the risk-reward for China’s stocks looks enticingly attractive at this stage,” he added.
Echoing a positive year ahead for Chinese shares, OCBC's Mr Xie pointed to valuations, measured by metrics like price-to-earnings ratio, that are set to improve further with the likelihood of China’s economy and corporate earnings bottoming out this year.
“China’s commitment to growth and confidence rebuilding will open the door for more upside to growth,” he said. “We expect China to roll out more stimulus measures to support the growth.”
OCBC’s forecast for the Chinese economy in 2023 is a re-acceleration in growth to 5.3 per cent, bucking the trend of a global slowdown.
The country’s policy pivot from a zero-COVID regime, tightening of real estate curbs and a clampdown on the technology sector will also help to limit downside risks, Mr Xie added.
TRAVEL, HOSPITALITY, RETAIL SECTORS TO SHINE
Analysts expect Chinese stocks in previously beaten-down sectors, such as travel and hospitality, to be among the outperformers this year.
Retail and other consumer-related sectors are also poised for a rebound, given the economic reopening under way and authorities’ announcement of more measures to support consumption.
Chinese banks are also preferred by DBS analysts based on cheap valuations, resilient corporate earnings and a “sustainable” dividend yield of 7 to 8 per cent.
That said, there are still downside risks which may result in a bumpy recovery ahead.
“Generally, a loosening of restrictions comes with intermittent waves of virus surge as we have seen in many instances globally. There is a possibility that the recovery in consumer spending may be more measured than what some may expect, as consumers avoid public places to some extent,” Mr Yeap said.
Higher infection numbers in the country will also cause disruptions to the labour market and economic activities, he added.
But even as challenges remain in the near term, the worst is likely over.
“Once we get past the near-term struggle of (a COVID-19 outbreak), a recovery in corporate earnings will set the next stage for upside,” said the market strategist.
Source: www.channelnewsasia.com