Chinese stocks are nearing five-year lows as hopes for a recovery fade

(Bloomberg) — Chinese shares are poised to fall to a five-year low seen in February as bearish sentiment reigns in the market amid a lack of earnings and an economic recovery.

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The CSI 300 fell as much as 1.2% on Monday, falling from this year’s high in May to more than 13%. A further decline would take the benchmark to levels not seen since early 2019, suggesting that years of policy efforts to revive the economy and support stock prices have proved futile.

The market is stuck in a cycle where stocks are set to hit new lows after a brief rally sparked by short-lived optimism. The government’s piecemeal approach to stimulus has failed to remedy a crisis of confidence, with deflationary pressure, anemic consumption and a prolonged property slump combining to erode hopes of a near-term economic recovery.

“There are some big structural headwinds, along with a deterioration in near-term momentum, that have weighed on investors,” said Matthew Haupt, portfolio manager at Wilson Asset Management. The government needs to regain “some confidence in the direction of the economy,” he added.

The CSI 300 index rallied 16 percent from February to mid-May as sovereign wealth funds bought billions of dollars worth of exchange-traded funds and regulators clamped down on short selling and quantitative trading. Its slide since then is just another example of how policies have failed to address the underlying ailments affecting sentiment.

Even China’s long-established UBS Global Wealth Management, Nomura Holdings Inc. and JPMorgan Chase & Co. have downgraded the country’s shares in recent weeks, citing concerns ranging from a slowdown in property-led demand to disappointing stimulus measures and future geopolitical tensions. of the US elections.

The fall in stocks coincided with a growing consensus among the world’s biggest banks that the country will miss its growth target of about 5 percent this year. In the latest blow to sentiment, China’s consumer prices rose less than expected last month, adding to signs that policymakers are struggling to rein in household spending.

To be sure, some investors say the ultra-cheap valuations of Chinese stocks offer good risk-reward opportunities. The MSCI China index trades at less than nine times its price-to-earnings ratio, compared with a ratio of 24 for its emerging-market rival India.

The story continues

The CSI 300 is close to levels seen during the February crisis, when exit orders in structured products such as snowball derivatives and quantitative funds exacerbated selling and investors turned to Indian stocks in a major shift of EM portfolios.

While there are some equity-specific opportunities, “even China’s long-term champions are not immune to the persistently weak economic environment in China, with limited visibility of improvement,” said Vivian Lin Thurston, portfolio manager at William Blair Investment Management in Chicago. “Domestic policy trends and geopolitical risks may continue to exert structural pressure on Chinese equity multiples.”

Earnings per share for the MSCI China index fell 4.5 percent from a year earlier in the second quarter, the weakest in five quarters, according to Bloomberg Intelligence data. Underscoring the contraction was the loosening of support from the nation’s eight largest technology firms.

Down nearly 7 percent this year, the benchmark CSI 300 ranks among the world’s worst major performers and is headed for a record fourth year of losses.

(Updates with a new comment from William Blair in the third paragraph from the bottom.)

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