Hope blooms for Chinese stocks as analysts stop cutting estimates

(Bloomberg) — A stabilization in earnings forecasts adds to optimism that the worst may be over for struggling Chinese stocks.

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Analysts have stopped cutting estimates for members of MSCI China, after cutting them by 10% since early March, according to data compiled by Bloomberg. Goldman Sachs Group Inc. and China International Capital Corp. expect earnings to rise for the benchmark in the second half of this year.

And a string of better-than-expected results from internet giants including Alibaba Group Holding Ltd. and Baidu Inc. – which led to double-digit gains in their shares – suggest some investors had become overly pessimistic about earnings prospects.

READ: Meituan 1Q Beat boosts optimism on Stock, Business: Street Wrap

The prospect of stabilizing earnings adds ballast to the change in investor sentiment that allowed Chinese stocks to break a six-month streak of losses in May, outperforming their global peers in the process. The easing of virus curbs and a series of policy measures to boost growth have brought foreign investors back into the market and strategists are increasingly optimistic about the outlook for equities.

“Multi-year low valuations, increasingly supportive government policies, with some companies reporting better-than-expected earnings” and an easing of Covid lockdowns are helping Chinese bulls, said Jian Shi Cortesi, portfolio manager at GAM Investment. Management in Zürich.

A bullish case for Chinese stocks now looks stronger than the unfounded optimism that prevailed at the start of the year, when many Wall Streets called a bottom to see stocks fall further. The MSCI China gauge fell 18% in 2022 as Covid lockdowns hurt an already weak economy. It is down more than 45% from the peak in February 2021.

In recent weeks, Amundi SA, AllianceBernstein, UBS Global Wealth Management and Citigroup Inc. have grown more bullish on Chinese stocks as Shanghai emerges from a lockdown. Meanwhile, Chinese officials have pledged to adopt measures to boost growth following Premier Li Keqiang’s recent call to avoid an economic contraction this quarter.

“We believe the chances of a gradual recovery in China stock prices are on better footing this time around,” said Aninda Mitra, head of Asia macro-economics and investment strategy, BNY. Mellon Investment Management SP Pte. in Singapore.

Admittedly, buying China remains a brave call for some. Profits at Chinese industrial companies fell in April for the first time in two years as Covid outbreaks and shutdowns disrupted factory output, transport logistics and sales.

Skeptics will examine the strength of any economic rebound and watch whether infection numbers can stay low as normal life resumes. They will need to verify any recovery through macro data such as loans, manufacturing and trade.

For Goldman strategists, consensus full-year earnings estimates are still too high and sectors such as pharmaceuticals, tech hardware and telecoms look particularly vulnerable. But they see a turning point for the forecast after the end of the current quarter.

“Sequential earnings growth should begin to improve in Q3 as economic momentum likely rebounds,” a team including Kinger Lau wrote Thursday. A model based on the recovery of the economy would point to 4% year-over-year EPS growth in the third quarter, likely up from a 4% decline in the second quarter, they wrote.

But demand for Chinese exposure is coming back. Global funds bought Shanghai and Shenzhen stocks via trading links for a fifth straight day on Thursday, pushing year-to-date flows into positive territory for the first time since early March. And speculative interest in buying the dip has increased.

“Only the bravest could have bought in March. Now I think more and more investors feel comfortable buying,” said Li Yan, senior market analyst at SBI Securities in Tokyo. “The market seems to have become more confident.”

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