Hope Blooms for China Stocks as Analysts Stop Cutting Estimates

(Bloomberg) -- A stabilization in earnings expectations is adding to optimism that the worst may be over for China's beleaguered stocks.

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

And a string of better-than-feared results by internet giants including Alibaba Group Holding Ltd. and Baidu Inc. -- which led to double-digit gains in their shares -- suggests some investors had become too pessimistic on the outlook for earnings.

READ: Meituan 1Q Beat Raises Optimism on Stock, Business: Street Wrap

The stabilizing profit outlook adds ballast to the shift in investor sentiment that allowed Chinese stocks to break a six-month losing streak in May, outperforming global peers in the process. Easing virus curbs and a slew of policy measures to stimulate growth have brought foreign investors back to the market and strategists are turning increasingly bullish on the prospects for stocks.

“Multi-year-low valuations, increasingly supportive government policies, some companies reporting better-than-expected earnings” and a relaxing of Covid lockdowns is helping China bulls, said Jian Shi Cortesi, a portfolio manager at GAM Investment Management in Zurich.

A bullish argument for Chinese equities now looks more solid compared to the unfounded optimism that prevailed at the start of the year, when many on Wall Street called a bottom only to see stocks slide further. The MSCI China gauge has fallen 18% in 2022 as Covid lockdowns hurt an already-weak economy. It is down over 45% from a February 2021 high.

In recent weeks, Amundi SA, AllianceBernstein, UBS Global Wealth Management and Citigroup Inc. have become more optimistic on Chinese shares as Shanghai emerges from a lockdown. Meanwhile, Chinese officials have vowed to enact steps to boost growth following Premier Li Keqiang's recent call to avoid an economic contraction this quarter.

“We think the odds of a gradual equity price recovery in China are on a better footing this time around,” said Aninda Mitra, Head of Asia Macro & Investment Strategy, BNY Mellon Investment Management SP Pte. in Singapore.

To be sure, buying China remains a brave call for some. Profits at Chinese industrial firms shrank in April for the first time in two years as Covid outbreaks and lockdowns disrupted factory production, transport logistics and sales.

Skeptics will be scrutinizing the strength of any economic rebound and watch if infection numbers can stay down with the resumption of normal life. They will need verification of any recovery through macro data such as loans, manufacturing and trade.

For Goldman strategists, full-year consensus earnings estimates are still too high and sectors such as pharmaceutical, technology hardware and telecoms look particularly vulnerable. But they see a turning point for forecasts after the current quarter ends.

“Sequential earnings growth should start to improve in 3Q alongside the likely rebound in economic momentum,” a team including Kinger Lau wrote Thursday. A model based on the recovering economy would point to 4% year-on-year EPS growth in third quarter, likely up from a 4% decline in the second quarter, they wrote.

But demand for Chinese exposure is returning. 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 surged.

“Only the most brave would have been able to buy in March. Now I think more investors feel comfortable about buying,” said Li Yan, a senior market analyst at SBI Securities in Tokyo. “The market seems to have grown more confident.”

More stories like this are available on bloomberg.com