Chinese Stocks Face Uncertainty as Investors Debate the Bottom
Fresh data only seem to reinforce how China’s problems can’t be fixed in a few days, while questions swirl around how much — or how willing — policymakers are to act.
One theme that hasn’t changed in such an uncertain environment is playing specific stocks. Evercore ISI strategists said many U.S.-listed Chinese stocks are “oversold” and expects those “trading at depressed valuations with an attractive [earnings per share] backdrop to outperform”, analysts said in a Jan. 28 report.
Evercore ISI Screens for Undervalued Chinese Stocks
Evercore ISI strategists have screened for U.S.-listed Chinese stocks that are trading at depressed valuations and have an attractive earnings growth outlook. Their criteria included a market capitalization of more than $1 billion, expectations for earnings growth in the next two years, and trading at a more than 50% discount to their 10-year average price-to-earnings ratio or more than 50% below its pandemic peak.
Part of Evercore’s thesis is that Beijing will take further policy action after an annual parliamentary meeting in early March. The People’s Bank of China has announced a 50 basis point cut to the reserve requirement ratio, effective Monday.
Signs of Bottoming Out for Chinese Stocks
Despite the recent sharp sell-off in Chinese stocks, Evercore points out that more than 85% of stocks in Hong Kong’s Hang Seng Index traded below their 200-day moving average, which historically coincides with bottoms and strong reversals. The Shanghai Stock Exchange’s A share index has also fallen below a so-called National Fate Line going back to around 2005.
Chinese stocks have fallen for more than two years, resulting in funds with a value tilt performing well. However, it is difficult to predict if there will be a shift from value to growth.
Skepticism Surrounds Market Recovery
While there have been interim gains following news of the People’s Bank of China’s cut and renewed state efforts to support markets and growth, some remain skeptical that the worst has been seen. Clocktower Group suggests that stock market performance has little influence over Beijing’s macroeconomic thinking and a fundamental policy shift is unlikely unless the market collapse transmits to the real economy and threatens social stability.
China’s New Phase of Growth Requires a Shift in Investor Focus
China is entering a new phase of growth after decades of double-digit expansion, and investors need to shift their focus from rapid growth to company competitiveness and individual returns. In the past, investors may have paid too much attention to growth without considering other factors.
Evercore ISI’s screen shows that lesser-known companies like fintech company Lufax, electric car company Li Auto, and recruiting site operator Kanzhun are projected to have double-digit earnings growth this year and next, while internet tech giants Alibaba, Baidu, and JD.com are expected to have single-digit increases in earnings this year, followed by growth of around 10% next year.
Conclusion
Chinese stocks continue to face uncertainty as investors debate whether the bottom is truly in. However, Evercore ISI’s screening of U.S.-listed Chinese stocks suggests there are opportunities for investors, with undervalued stocks expected to outperform. The data also point to a potential turning point for Chinese stocks, but skepticism remains. As China enters a new phase of growth, investors need to shift their focus to company competitiveness and individual returns.
Analyst comment
Positive news: Evercore ISI strategists have identified undervalued Chinese stocks with attractive earnings growth outlook. They expect these stocks to outperform in the market. This suggests opportunities for investors.
Neutral news: Chinese stocks face uncertainty as investors debate whether the market has reached its bottom. While data indicate potential turning points and historical indicators of bottoms, skepticism remains.
As an analyst, I predict that the market for Chinese stocks will experience volatility in the short term as investors weigh the uncertainties. However, the identified undervalued stocks may see positive growth and outperform in the market.
