HONG KONG, Dec 12 (Reuters) – Investors in Chinese stocks will look for companies with global reach or other protections against an economic downturn next year after China underperformed global markets for three straight years.
Companies in defensive sectors such as healthcare, medical innovation and exporters in the electric vehicle and advanced manufacturing supply chain, as well as multinationals such as e-commerce firm PDD Holdings (PDD.O), will top the list.
This is despite sell-side analysts being optimistic about the Chinese market next year: Morgan Stanley and Goldman Sachs predict Chinese stocks will outperform the S&P 500.
“As the economic recovery is slower than expected, we have reduced exposure that is sensitive to macro cycles,” said Wang Qing, chairman of Shanghai Chongyang Investment Management.
Chongyang is instead buying defensive stocks with high dividends, medical innovators with global competitiveness and Beijing-backed advanced manufacturing, Wang said, declining to list investments by name.
This follows China’s blue-chip CSI300 index (.CSI300) sinking to a five-year low, losing 12% in 2023, while global stocks (.MIWD00000PUS) rose 15% as the Chinese economy grapples with a housing crisis and a had to struggle with slow recovery from COVID-19.
Hong Kong’s Hang Seng (.HSI) fared even worse, sliding more than 18%, leaving its forward price-to-earnings ratio below six, while the S&P 500 (.SPX) was at 21.
The performance over the last ten months has wiped out the optimism that prevailed at the start of the year, with four consecutive months of foreign outflows totaling 138 billion yuan ($19 billion) via the Stock Connect in the second half of the year. program were withdrawn from Chinese stocks.
“Investors have had difficulty thinking about what the next growth driver for China will be,” said Caroline Yu Maurer, head of China and specialist Asia strategies at HSBC Asset Management.
Goldman analysts are targeting the CSI300 (.CSI300) at 4,200 by the end of 2024, up 23% from Monday’s close of 3,419. Morgan Stanley forecasts the blue-chip index will be at 3,850 at the end of next year and the Hang Seng (.HSI) – which ended at 16,201 on Monday – will be at 18,500, up 14%.
By contrast, Goldman expects the S&P 500 (.SPX) to rise less than 2% from current levels to 4,700 by the end of next year. Morgan Stanley sees a decline to 4,500.
EXPORTERS AND MULTINATIONAL COMPANIES
Real estate casts the longest shadow. The sector, which once accounted for a quarter of China’s economy, is reeling from a series of developer failures and a crisis of confidence that fund managers want to see resolved before committing capital.
Moody’s last week downgraded China’s credit rating, partly due to the housing crisis. Shares of Country Garden (2007.HK), once China’s largest private real estate developer but now struggling to service its debts, have fallen 73% this year.
The Hang Seng Mainland Developer Index (.HSMPI) fell 44%.
Given the impact of the housing shock on the economy and subdued consumption, Morgan Stanley estimates that the number of MSCI China companies that missed analysts’ earnings expectations in the third quarter was the highest since 2018.
New York hedge fund Indus Capital Partners is among several investors moving away from exposure to Chinese domestic demand.
We see value in “some exporters and multinationals, as well as low-cost (state-owned) companies that are linked to the government and are otherwise not a big problem for them,” said Indus partner John Pinkel, without naming specific companies.
For example, shares of PDD, which owns US-based shopping app Temu, are up 75%. Discount retailer Miniso (9896.HK) also has a global presence and its shares are up 80% this year.
Global asset manager Invesco has an overweight of Chinese assets in its Asian portfolios, and strategist David Chao highlighted the appeal of global expansion, pointing to the success of Japanese companies abroad while growth slowed at home.
Of course there are bargain hunters.
Wenli Zheng, portfolio manager at T. Rowe Price, said shipbuilders have record backlogs and that this is an ideal time to buy good but economically sensitive companies that trade cheaply, such as Kanzhun (2076.HK), a recruiter or shopping center operator China Resources Mixc Lifestyle (1209.HK).
Jefferies said it was “tactically positive” for China amid an appreciating yuan and favorable valuations, and LSEG data shows sellside analysts expect Chinese companies to see their strongest earnings growth in seven years in 2024.
But BofA Securities’ November survey of 265 Asian fund managers found the majority are either waiting for an improvement or looking elsewhere, suggesting there is no rush to increase their exposure to China.
($1 = 7.1872 yuan)
Reporting by Summer Zhen; Additional reporting by Samuel Shen in Shanghai; Editing by Tom Westbrook and Tom Hogue
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