Investors should continue to avoid Chinese stocks, it warns.
The value of China’s stock market has slumped in the new year, putting more pressure on the shares of some of the most respected companies trading in the world’s second-largest economy.
The steep January decline follows years of losses for the Hong Kong-based Hang Seng Index and other indices that track mainland stock trading performance, according to FactSet data.
The sell-off, which has worsened so far, is sparking debate on Wall Street over whether Chinese stocks have fallen far enough to justify buying them on the cheap.
Let’s take Alibaba Group, which owns BABA, as an example.
for example. The company currently trades at a forward price-to-earnings ratio of about 8, its lowest level since its 2014 IPO, according to FactSet data. It’s currently trading at around $73 per share on Tuesday, up 6.9%, marking its best daily session since July.
Investors are generally wary of trying to “catch a falling knife,” using market parlance to time the bottom, but at least one veteran analyst shared some ideas about what it will take for Chinese stocks to experience a sustained rebound. .
“In conclusion, Chinese stocks have suffered a series of (mainly) self-inflicted wounds from a policy perspective, and we should expect continued pressure on Chinese stocks until there is evidence that authorities are working to stimulate growth or reduce regulatory interference. .” Tom Essaye, founder of Sevens Report Research, said in a note Tuesday.
As Essaye explains, Chinese stocks have been struggling for years, with the Shanghai-traded CSI300 index XX:000300 falling to a five-year low on Monday. Meanwhile, Hong Kong Hang Seng Index HK:HSI,
The region, home to many large mainland-based companies, hit its lowest level in 14 months, according to FactSet data.
What will it take for Chinese stocks to see a sustained rebound? According to Essaye, the selling in Chinese stocks is starting to look excessive, but he’s not yet convinced that companies like Alibaba represent solid “buys” at their current valuations.
Changing his mind would require two major policy changes at the highest levels of the Chinese government, Essaye said.
First, international investors need to see evidence that the People’s Bank of China actually offers meaningful stimulus. Expectations of a central bank interest rate cut were dashed on Monday, putting further pressure on Chinese stocks.
But more important than getting the central bank to provide stimulus is that Chinese authorities must once again prove they can be business-friendly by cracking down on the country’s biggest technology companies.
“So far, there is little evidence for either,” Essaye said.
Chinese stocks fell for three consecutive years through the end of 2023, FactSet data shows. Nonetheless, the iShares China Large-Cap ETF FXI includes Alibaba Group Holding Ltd. BABA,
JD.com JD,
Tencent Holdings 700,
Others.
As a result, Chinese stocks are now among the most underperforming and not recommended stocks globally, Essaye said. This alone could make it attractive to some contrarian investors who may be willing to wait for further declines.
Chinese stocks had a solid bounce on Tuesday morning following reports that China was considering a $278 billion package to support the country’s stock market. The news lifted stock prices of Chinese companies across the board, with gains concentrated in large Chinese technology companies such as members of the KraneShares CSI China Internet ETF KWEB..
see: Hang Seng jumped to record lows on report of Beijing’s $278 billion support package.
But few on Wall Street expect Tuesday’s rebound to be a turning point for Chinese stocks.
“The short answer is probably more pain ahead” for Chinese stocks ahead of the strong optimism, Matthew Tuttle of Tuttle Capital Management told MarketWatch in an email.
