China bulls are tired of waiting for the elusive stock recovery

(Bloomberg) — Weakness in Chinese stocks is eroding the confidence of some of Wall Street’s happiest supporters of hopes for a recovery in the world’s No. 2 economy.

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Over the past two weeks, longtime Chinese bulls UBS Global Wealth Management, Nomura Holdings Inc. and JPMorgan Chase & Co. they downgraded all the country’s stocks, citing concerns ranging from falling property-driven demand to fragmented stimulus measures and geopolitics. tensions ahead of the US election.

The dwindling patience with an increasingly elusive recovery in Chinese shares has coincided with a growing consensus among the world’s biggest banks that the country will fail to meet its growth target of around 5 percent this year. The market weakness could also accelerate a shift away from the China-centric model to new favorites such as India, Taiwan and Southeast Asia.

“I think this bunch of downgrades is like people throwing in the towel” on China stocks, said Britney Lam, head of long-shorts at Magellan Investments Holding Ltd. While light positioning may spark a short-term rebound in China, Lam said he prefers Japan and India in the long term.

Down 5.8 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. While hopes for improved corporate earnings and stronger policy support helped the index post a 16 percent gain between February and May, gains mostly evaporated after a dismal earnings season provided a check of reality.

The entrenched pessimism about China’s growth prospects is also evident in other markets. Yields on China’s 10-year sovereign note fell to a new record this week, while the 30-year bond yield extended declines above a nearly two-decade low. Iron ore futures are trading near 2022 levels, while flight-to-safety investment flows have been so strong that risk premiums on local Chinese corporate debt have hit a one-year high.

Excluding the country’s stocks from global investment portfolios is also fueling a pullback. New emerging market equity funds launched this year, which do not include the nation, have already matched the 2023 record of 19.

India has emerged as a favorite due to its vibrant economy, with Morgan Stanley saying the nation’s weighting exceeds China’s in the MSCI Emerging Markets Investable Market Index should spur further foreign inflows.

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“As the current low inflation environment in China is conducive to global disinflation and rate cuts, other emerging markets will continue to benefit,” said Homin Lee, senior macro strategist at Lombard Odier Singapore Ltd. “Many managers will keep their eyes on markets booming emerging markets such as India and Taiwan for this reason despite high valuations.”

Valuations may be a reason for opportunists to return to China. The MSCI China Index trades at less than nine times price-to-earnings, making the country’s shares relatively cheap for risk-averse investors.

“Whatever one thinks of the government’s policies, China’s economy is here to stay,” Capital Group fund managers, including Christopher Thomsen, wrote in an Aug. 28 note. electric vehicle supply chain and industrial automation, they added.

However, this may do little for a broader recovery given the worsening earnings landscape. Both the CSI 300 and the Shanghai Composite Index have remained the worst performers on the earnings outlook in Asia since at least April. Their 12-month long-term earnings estimates have each fallen more than 9% this year.

The latest downgrades in China’s trading recommendations are “causing a reassessment of emerging market portfolios,” said Manish Bhargava, chief executive at Straits Investment Management in Singapore. “India is poised to benefit given robust economic growth and progressive reforms.”

–With assistance from Jason Rogers, Iris Ouyang, and Yuling Yang.

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