July 21, 2024

Chinese stocks’ darkest days may be over as earnings rebound, property recovery seen lifting gloom in 2024 – UBS

The worst may be over for Chinese stocks after three straight years of losses dealt a US$1.4 trillion wipeout, as a recovery in corporate earnings takes hold amid a ramp-up in policy support in the world’s second largest economy, according to Swiss bank UBS Group.

An uptick in profits for industrial companies, which largely move in tandem with earnings for Chinese domestic listed companies, is probably a signal that the gloom is lifting, Meng Lei, a UBS strategist, said at the banks annual Greater China conference in Shanghai on Monday. Policymakers could bail out cash-strapped developers, and homebuyers could respond positively to mortgage rate cuts, he said, adding there is room for cuts in interest rates and the reserve requirement ratio this year.

Profits for industrial companies surged 29.5 per cent from a year earlier in November, posting growth for a fourth consecutive month after reversing declines in August, data from the statistics bureau showed.

“We believe company earnings growth [in 2024] and government support through monetary, lending and fiscal policies will restore investor confidence,” said Meng. “A turnaround is expected to occur after companies post a jump in their profit in the first-quarter earnings reports.”

The call emerges despite Chinese stocks recording their worst opening week of trading in 21 years. The CSI 300 Index, which tracks the biggest stocks on the Shanghai and Shenzhen exchanges, tumbled 3 per cent last week. It was the most subdued start to the year since 2003, when the year opened with a 4.2 per cent weekly loss. Last week, foreign investors sold a combined 5.52 billion yuan (US$771.3 million) of Chinese onshore stocks via the exchange link programme with Hong Kong, according to Bloomberg data. The CSI 300 dropped 11 per cent for a record third annual decline in 2023, following losses of 22 per cent and 5.2 per cent in 2022 and 2021, respectively.

A worker speaking on his phone walks past a construction site in Beijing, China. Photo: Reuters

Denting sentiment was a lack of conviction about the sustainability of China’s post-Covid-19 recovery. The manufacturing industry contracted for a third month in December, and declines in home sales intensified, even though the services sector remained in the expansionary zone for 12 straight months.

“Asset classes other than stocks have reflected a recovery in China,” said Meng, highlighting the yuan’s rebound in the fourth quarter. “It’s an issue about confidence and expectations. There’s some mispricing of stocks.”

Sanctioned stocks, shunned by US investors, are top performers for Chinese funds

UBS has remained upbeat on Chinese stocks since November, when it said that an acceleration of earnings growth would drive a rebound. Profit growth for Chinese listed companies is expected to quicken to 8 per cent this year from 3 per cent in 2023 amid an economic recovery, it said. The investment bank is bullish on stocks in the electronics, food and drink, insurers and telecoms sectors, while advising caution on property and banking stocks.

Goldman Sachs is forecasting a 16 per cent upside in the CSI 300 this year on earnings growth and a moderate valuation expansion, while Morgan Stanley expects the index to rise about 7 per cent.
“If our forecast of an 8 per cent earnings growth is justified, northbound funds from foreign investors will come back to buy A-shares,” Meng said, referring to yuan-denominated Chinese stocks. “We are cautiously optimistic” about overseas demand for these stocks through the exchange link scheme.

UBS has held its Greater China Conference annually since 2001. This year’s event is around the theme of “China and the world: recalibration and alignment” and the two-day gathering will focus on topics such as how China will deploy policy tools to spur growth, and tackle issues like the property market and local-government debt. More than 3,000 participants, including 1,500 institutional investors and executives from about 300 Chinese listed and private companies, are expected to show up for the event, according to UBS.

Some prominent speakers this year include Zhu Min, former deputy governor of the People’s Bank of China, and Steven Barnett, senior resident representative in China at the International Monetary Fund.

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