As China Equities Stabilize, Second Quarter Looks Inviting -- Talking Markets

Dow Jones2023-03-31
 

By Yifan Wang and Bingyan Wang

 

China equities came up short for some investors hoping for a quick turnaround in 2023 with the end of Beijing's Covid-era restrictions. But as expectations reset around a gradual recovery and a modest economic growth target, better results may be in store in the months ahead, analysts say.

The MSCI China Index, which tracks about 85% of all China equities, is up 4.8% with one trading day to go in the first quarter. That is ahead of the benchmark index in Hong Kong but well behind those in South Korea, Japan and Taiwan. Over the past 12 months, the MSCI China is still down about 7.0%.

But now "is probably a good time to be back in the market," said Wendy Liu, JPMorgan's chief China equity strategist. Risk factors are "better priced in and the market will be shifting its attention to earnings and reopening."

The U.S. investment bank favors companies whose earnings are closely tied to China's macroeconomic improvement, such as the discretionary-consumer-goods sector and "value plays in energy, materials and industrials." It also likes large state-owned enterprises in those industries, given Beijing's plans to set new performance targets for government-owned companies.

JPMorgan's preferred picks include China's oil majors trio of PetroChina Co., China Petroleum & Chemical Corp. and Cnooc Ltd., telecom carriers China Mobile Ltd., China Telecom Corp. and China Unicom (Hong Kong) Ltd., and natural-gas company Kunlun Energy Co.

Factors including Beijing's 5.0% growth target for this year--its lowest in a quarter-century--as well as muted corporate guidance and investors' disappointment over the scale of stimulus contributed to a quarter that finished well off its January highs. The MSCI's quarterly gains were even smaller earlier this week, before news of a major restructuring plan by tech giant Alibaba Group Holding Ltd. lifted sentiment for China stocks.

With consensus now in place for a slower recovery, the market appears to be stabilizing after a roller-coaster start to the year, analysts say.

The earnings recovery momentum could become "quite visible" by midyear, said Kinger Lau, Goldman Sachs's chief China equity strategist.

Mr. Lau highlighted the consumption rebound trade, as well as "attractively priced" growth and "strong risk-reward profiles" from sectors such as healthcare-services providers, drug developers and medical-equipment makers. Companies such as Aier Eye Hospital Group Co., Wuxi Biologics (Cayman) Inc., CSPC Pharmaceutical Group Ltd. and Shenzhen Mindray Bio-Medical Electronics Co. are rated as buys by Mr. Lau.

Citigroup's China chief economist, Yu Xiangrong, said that for the next two years at least, "development would be the top priority for the government" and "policy setting will remain favorable to risk assets and investment confidence."

He cautioned, however, that potential monetary-policy normalization by Beijing poses a liquidity risk in the event growth gets back on track, noting that remarks at annual legislative meetings suggested inflation could be in focus this year.

 

Write to Yifan Wang at yifan.wang@wsj.com and to Bingyan Wang at bingyan.wang@wsj.com

 

(END) Dow Jones Newswires

March 31, 2023 05:42 ET (09:42 GMT)

Copyright (c) 2023 Dow Jones & Company, Inc.

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