Chinese bull stocks hit reset button after $1.5 trillion rout

(Bloomberg) — After being caught off guard by a $1.5 trillion rout of Chinese stocks, some of Wall Street’s biggest banks are turning to a less bullish consensus.

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Strategists at Goldman Sachs Group Inc., Nomura Holdings Inc. and Morgan Stanley all cut their MSCI China index targets by at least 11% over varying periods. Their latest projections suggest that while the gauge may rebound from current levels, it will struggle to regain the high seen in January, when the reopening frenzy was at its peak.

Such a recalibration comes after a slew of missing data clouded the economic recovery. Tensions with the United States also played a role, while the key real estate market remains in the doldrums. For those betting on the authorities to accelerate stimulus, measures so far have been targeted at best.

“At the index level, we frankly think the Chinese market could tread water, grow a bit in the second half, but probably won’t offer as much,” said David Wong, senior equity investment strategist at AllianceBernstein. Holding LP. Although there has been a boost to reopening, “it has been more limited than people anticipated,” he said.

Going long on Chinese stocks was the unanimous call from Wall Street banks heading into 2023, as Beijing’s abandonment of Covid Zero boosted bets for a quick recovery. Most strategists turned overweight, expecting the MSCI China index to extend a nearly 60% rise from late October to late January.

Even when gains began to falter, few expected the downturn to be so prolonged and steep. The gauge is down nearly 20% from its Jan. 27 peak, losing about $1.5 trillion to the depth of the rout. The Hang Seng China Enterprises Index also fell in a bear market, while the benchmark CSI 300 index for mainland stocks erased all of its gains for the year.

What made matters worse was the growing appeal of some other Asian markets and the lack of strong catalysts for China. While hopes are high for more political stimulus, including a potential interest rate cut, a large package of stimulus pledges – which helped reverse the March 2022 rout – is less likely as authorities seek to control leverage.

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All this does not mean that China has become uninvestable. Goldman Sachs and Morgan Stanley maintained their overweight recommendations despite declines in index forecasts, expecting some recovery from there.

Valuations are also too attractive to ignore by some like JPMorgan Asset Management and Invesco Asset Management Ltd. Certain equity groups, such as public companies and those related to artificial intelligence, could continue to outperform given the focus of policymakers on these sectors.

“I expect to see a better second half,” said Frank Benzimra, head of Asia equity strategy at Societe Generale SA, which has held a neutral rating on Chinese equities since November. “From a strategic point of view, we would need a higher level of risk premium to be comfortable. But from a technical point of view, we could see a rebound.”

Still, market return expectations look modest longer term due to continued political uncertainty and doubts about China’s ability to return to its former pace of economic expansion and industrial growth.

A recovery in corporate earnings is also starting to look fragile after a lukewarm first quarter. Forward earnings estimates for the MSCI China indicator fell 4.7% from February’s peak, given weaker recovery expectations and intensified price wars in some sectors.

“It’s the longer-term sustainability of the recovery that worries investors now,” Laura Wang, Morgan Stanley’s chief China strategist, told Bloomberg Television this week. “So what we’re seeing here is absolutely slower earnings growth compared to our previous expectations.”

READ: Chinese bulls pull back as stocks see another selloff

–With the help of Charlotte Yang and Zhu Lin.

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