By Reshma Kapadia
Chinese stocks logged their best gains since the 2008-2009 financial crisis as a batch of stimulus and vows for more have forced investors to take a closer look at a part of the market they have largely abandoned in the past year.
Skepticism still persists on whether Chinese policymakers will deliver in a big enough way to turn around depressed household and business confidence. The world's second-largest economy has been sputtering. But there is enough to propel Chinese stocks further in the short term, even after the 25% gain in the CSI 300 index in the past week.
The reason? Beijing's surprise attempt at coordinated stimulus efforts that could pump several trillion renminbi into the economy through rate cuts, the possible recapitalization of big state banks, and swap facilities to support the onshore stock market have injected optimism into a market sorely lacking it.
Ahead of China's Oct. 1-7 Golden Week holiday, when Chinese markets will be closed for trading, the iShares MSCI China A-Shares, an exchange-traded fund of onshore listings, rose 5.6% to $30.58 early on Monday. The iShares MSCI China index gained 2% to $52.04.
Those trying to play that rally, but relatively safely, are looking to consumer stocks because Beijing is directing its attention to reviving consumer spending. Many expect stocks on the onshore A-shares market to get a bigger boost than those that trade in Hong Kong or abroad. The reason to favor consumer stocks is clear. Chinese top leaders have vowed to support job growth and give cash handouts, something leader Xi Jinping has long objected to. The money will be directed toward lower-income households and parents as China deals with a baby bust.
"It marks a policy pivot that likely means more stimulus for households if spending fails to pick up," strategists at Pavilion Global wrote in a note to clients.
Consumer companies have seen sales growth decelerate to recent lows, though profits have held up decently. Analysts expect the influx of stimulus to bolster sales growth again.
Beijing's effort could help China's biggest e-commerce and travel companies, especially because Golden Week is about to begin. The Singles Day shopping bonanza on Nov. 11, which is akin to Black Friday in the U.S., is another positive.
In a note to clients, Citi analyst Alicia Yap sees a possibility that analysts could raise their forecasts for corporate earnings if stimulus does revive economic activity. If consumers are more willing to spend, that could benefit Chinese internet stocks from travel to retail and videogames that are cheap compared with their global peers.
The valuations, Yap says, don't bake in the potential for earnings forecasts to rise if the outlook for the economy and profits growth improves. "The wealth effect from market rally should boost consumer confidence and in anticipation of higher consumption demand, could encourage businesses and advertisers to increase ad spend budget, translating to higher ad revs growth and increase online and offline activities," she wrote.
Tencent Holdings, the huge videogame company, is one beneficiary of increased ad spending. Travel and local services, one area where Chinese consumers have continued to spend, could also benefit if the stimulus gives households more confidence about job security and nudges them to plan longer-haul journeys, said Yap. Her top picks are Tencent, Trip.com, and the online delivery company Meituan.
Though competition among e-commerce companies remains fierce, Alibaba Group Holding could also benefit as investors reconsider valuations for the sector. Yap raised her target price on Alibaba to $136 from $116.
Strategists expect more details on a fiscal package in the next two to four weeks. They caution that further gains for stocks are dependent on Beijing delivering in a big enough way to encourage households and businesses to get out of the equivalent of the financial fetal position and start spending and taking risks again. Despite the skepticism, market history is drawing investors in. Bank of America strategist Winnie Wu sees a setup akin to the one that played out at the end of 2014. Onshore stocks surged following a cut of 0.4 percentage point to interest rates and efforts to deal with local government debt.
Another draw is that China's CSI 300 index has seen only about five years of rising markets over the past two decades. The only way to make money in Chinese stocks was to be in on the rallies, according to Gavekal Research analyst Thomas Gatley. That explains why investors are tiptoeing back in despite their skepticism and the risks associated with the U.S. election and a possible escalation in the trade war.
The key will be to stay nimble. Investors shouldn't get carried away by expectations until there is evidence on the ground.
Write to Reshma Kapadia at reshma.kapadia@barrons.com
This content was created by Barron's, which is operated by Dow Jones & Co. Barron's is published independently from Dow Jones Newswires and The Wall Street Journal.
(END) Dow Jones Newswires
September 30, 2024 10:45 ET (14:45 GMT)
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