Goldman, Bernstein and BlackRock bullish on Chinese stocks

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A man wearing a mask walks in the Shanghai Stock Exchange building in the Pudong financial district in Shanghai, China, as the country is hit by an outbreak of the novel coronavirus, February 3, 2020.

Aly Song | Reuters

BEIJING — More and more international investment analysts are saying it’s time to buy mainland Chinese stocks, ahead of expected government support for growth.

In addition to the pandemic’s slowdown on the economy, heightened regulatory uncertainty since last summer has generally kept foreign investors cautious about Chinese stocks.

But that’s starting to change for some investment firms in recent months.

In its 2022 Global Equity Strategy Report, Credit Suisse upgraded China to “overweight”, reversing a downgrade in equities some 12 months ago.

“Monetary policy is easing [in China] while elsewhere it is hardening,” wrote its global strategist Andrew Garthwaite and his team in the late January report. “The economic dynamic is accelerating.

One of the first positive turns on mainland Chinese stocks came from the BlackRock Investment Institute in late September. As of early 2022, other companies have also made similar calls, while others remain neutral.

On the political front, Credit Suisse expects regulatory uncertainty to ease after a national parliamentary meeting in March and remain silent – at least until the end of the 20th National Congress of the ruling Chinese Communist Party. fourth trimester.

Chinese President Xi Jinping is set to take on an unprecedented third term at the meeting, which is held every five years to select top government leaders.

At an economic planning meeting in December for 2022, Chinese officials stressed the need for stability.

Financial factors, such as the extent to which equities have fallen relative to their potential ability to generate profits, are also contributing to analysts’ positive return on Chinese equities.

Bernstein: China is no longer “uninvestable”

In January, Bernstein released a 172-page report titled “China Equities: ‘Uninvestable’ No More.”

“We believe there is merit in adding China exposure to global portfolios for six main reasons,” analysts at the investment research firm said.

They highlighted expectations for growth in new financing, easing of monetary policy and more attractive stock market valuations relative to the rest of the world. Other factors included a rare opportunity to pick stocks, growing foreign inflows and increased earnings.

HSBC: Investors too bearish on China

The Shanghai composite has climbed 2% since the Lunar New Year holiday, which ran from Jan. 31 to Feb. 6 this year. The gains follow a 7.65% decline in January, the worst month for the index since October 2018, according to data from Wind Information.

Yes, China is struggling with growth and a stronger dollar is not good news for Chinese stock markets. But it is now well known and it is expensive.

“Investors are too bearish on Chinese equities,” HSBC analysts wrote in a Feb. 7 report that backed up its call in October to overweight Chinese stocks.

“Yes, China is struggling with growth and a stronger dollar is not good news for Chinese stock markets,” the analysts said. “But it’s now well known and its price is priced in. Even good blue chip stocks are now trading at attractive valuations.”

The bank’s analysts forecast gains of 9.2% this year for the Shanghai composite index and 15.6% for the Shenzhen component index.

Goldman: A shares are now “more investable”

Goldman Sachs forecasts 16% gains for the MSCI China index this year as valuations remain below the Wall Street bank’s target of a price-to-earnings ratio of 14.5, its chief investment strategist said. Chinese stocks, Kinger Lau, in a January 23 report.

On Sunday, Lau and his team released an 89-page report on “why China A-shares have become more invested for global investors.” Their reasoning for investing in the world’s second-largest stock market is largely based on greater accessibility for foreign investors and an under-allocation to the stock class so far.

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A-shares are Mainland Chinese companies listed in China, either on the Shanghai Stock Exchange or the Shenzhen Stock Exchange.

Goldman Sachs had been overweight mainland stocks in February 2020, at the height of the coronavirus pandemic in the country.

UBS: from “underweight” to “overweight”

In late October, UBS announced it was upgrading Chinese stocks to “overweight”, up two notches from an “underweight” call in the summer of 2020.

In another sign of the company’s optimism, the Emerging Markets Strategy team said in January that its most compelling stock ideas include many Chinese internet names like Alibaba that have been the target of new market regulations. Beijing on alleged monopolistic practices and data security.

Not everyone is a Chinese bull

However, not all international investment firms are so optimistic.

Morgan Stanley’s Asian emerging markets equity strategy team is neutral on mainland China, as are Bank of America and JP Morgan Asset Management.

Over the past few years of stimulus, China hasn’t always had a bull market, Winnie Wu, China equity strategist, BofA Securities, said in a phone interview Monday. Although there are investment opportunities in some sectors, she expects corporate earnings growth in China to slow.

Wu pointed out that in 2016, despite stimulus expectations, stocks only started to rise after the second quarter. The Shanghai Composite Index closed down 12.3% that year.

Risks related to regulations, the real estate market

The sell-off in mainland equities so far this year reflects how investors have generally remained cautious of Chinese equities.

Even in upgrades, firms like BlackRock used conservative language like going “modestly positive” and warned that: “Given low benchmark weightings and typical client allocation to Chinese assets, the allocation should rise by multiples before representing a bullish bet on China, and more so for government bonds.”

A sharp drop in Chinese property prices, widespread pandemic-driven shutdowns and regulatory uncertainty pose risks to Credit Suisse’s outlook, Garthwaite said.

China’s pursuit of “common prosperity” – moderate wealth for all, rather than the few – emerged over the summer as the theme of Beijing’s regulatory changes.

While politics remains “the big unknown”, Garthwaite noted that official remarks – such as Xi’s speech at the World Economic Forum in January – point to an easier position going forward.

“The common prosperity we desire is not egalitarianism…we will first make the pie bigger and then divide it properly through reasonable institutional arrangements,” Xi said at the time. “All types of capital are welcome to operate in China.”

– CNBC’s Michael Bloom contributed to this report.

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