(Bloomberg) — Investors in Chinese stocks are losing patience as a long-awaited profit recovery fails to materialize and stock rallies unravel.
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China’s key indexes have seen the biggest cuts in profit forecasts in Asia this year as a deepening housing slump and weak retail sales have dampened business confidence. Stocks have lost steam from their mid-May highs, with the MSCI China index down more than 8%.
“MSCI China has seen its 11th consecutive quarter of earnings missing expectations, and the analyst consensus has yet to fully appreciate how weak the underlying growth environment in China is,” Jonathan Garner, chief Asia equity strategist at Morgan Stanley, said on Thursday. “You have to be careful entering China, and it’s getting increasingly competitive, especially in areas like e-commerce.”
Optimism about improving corporate earnings was at the heart of a bull market that lasted for several months earlier this year, with global funds cautiously moving back into the world’s second-largest stock market.The recent sell-off evokes dark memories of the past few years, when risks from geopolitical tensions to tighter regulation resurfaced and any recovery in stock prices was quickly overshadowed by selling.
Consensus profit estimates for the Shanghai Composite and CSI 300 indexes fell more than 6% this year, according to data compiled by Bloomberg, while MSCI’s Asia index rose 1.6%, with Indian and Japanese benchmarks posting even higher gains.
Separate data showed that profits for stocks in the MSCI China Index in the first three months of the year were about 3.5 percent below broad expectations, while domestic stocks showed a similar trend.
Foreign investors have been selling as the recovery falters. Overseas investors sold domestic stocks for the ninth straight day through Thursday, unloading more than $5 billion worth of funds, the longest streak since August 2023.
Investors are returning to a “wait-and-see stance as asset allocations slip back into underweight territory,” according to Bank of America’s latest Asia fund manager survey. “Frustration at being tossed around so many times is creating a structural bearish stance on the asset class,” strategists including Ritesh Samadiya wrote in a June 18 note.
The survey found that asset managers are 6% underweight Chinese stocks, down from a neutral stance in May.
Chinese investors are accustomed to market volatility, but some bet this time will be different after the Chinese government rolled out a series of measures to support the market, including a real estate rescue package.The measures, along with hopes of a recovery in earnings, have prompted strategists at UBS Group AG and Societe Generale SA to call for rare buys and prompted previously bearish asset managers such as veteran Mark Moebius to change course.
Amid the continued sell-off, with the CSI 300 index now down for a fifth straight week, doubts are spreading again. Adding to the concern are weak data: China’s home prices fell at an accelerated pace in May and the country’s biggest internet companies are relying on deep discounts to lure customers during the “618” shopping festival.
In its portfolio update at the end of May, T. Rowe Price changed to an overweight position in emerging market ex-China stocks but maintained its underweight position in China, saying the stimulus measures so far have been too small to reignite markets.
Optimists are pinning their hopes on one of China’s most important political events, the Third Plenum in July, where top leaders will outline long-term economic goals and signal a shift in policy. The MSCI China index “should perform well heading into July and August,” Wendy Liu, equity strategist at JPMorgan Chase & Co., wrote this week. She cited the Third Plenum and continued share buybacks as among the reasons.
The risk is that if the outcome of the Third Plenary Session of the Central Committee is disappointing, a lack of catalyst could lead to the prevailing view on Chinese stocks becoming decidedly pessimistic.
Alexander Redman, chief equity strategist at CLSA, said at a press conference in Jakarta earlier this month that analysts’ earnings projections for the next two years are “nothing short of miraculous,” adding that investors should hold on to China stocks as a benchmark because consensus earnings forecasts for China stocks seem too optimistic.
–With assistance from Ivy Chok, John Cheng, and April Ma.
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