by (Bloomberg) — After being wrong-footed by a $1.5 trillion price drop in Chinese stocks, some of Wall Street’s largest banks are coming to a less optimistic consensus.
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Goldman Sachs Group Inc. strategists, Nomura Holdings Inc. and Morgan Stanley have cut their targets for the MSCI China Index by at least 11% over several periods. Their latest projections suggest that while the meter may recover from current levels, it will struggle to regain the January highs when the reopening frenzy was at its peak.
Such a recalibration comes after a slew of data blunders that have thrown the economic recovery into disarray. Tensions with the US have also played a role, while the main real estate market remains in the doldrums. For those counting on authorities to ramp up stimulus, the measures so far have been targeted at best.
“At the index level, we honestly think the Chinese market will enter the water, grow a little bit in the second half, but probably not offer that much,” said David Wong, senior equity investment strategist at AllianceBernstein Holding LP. While there has been a reopening boost, “it has been more limited than people expected,” he said.
Going long in Chinese stocks has been the unanimous call among Wall Street banks heading into 2023 as Beijing’s shift from Covid Zero fueled bets on a speedy recovery. Most strategists were overweight and expected the MSCI China index to rise nearly 60% from the end of October to the end of January.
Even as profits ebbed, few expected the downturn to be so long and steep. The gauge has lost almost 20% from its Jan. 27 peak, losing about $1.5 trillion at the depth of the defeat. The Hang Seng China Enterprises Index has also entered a bear market, while the CSI 300 benchmark for mainland stocks has wiped out all of its gains for the year.
Making matters worse is the increasing appeal of some other Asian markets and a lack of strong catalysts for China. While hopes are high for more policy stimulus, including a possible cut in interest rates, a wide range of stimulus promises – which helped reverse the March 2022 defeat – are less likely as authorities try to keep leverage in check.
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All this is not to say that China has become uninvestable. Goldman Sachs and Morgan Stanley maintained their overweight recommendations despite index forecast cuts, and expect some recovery from now on.
Valuations are also too attractive to ignore for some, such as JPMorgan Asset Management and Invesco Asset Management Ltd. Certain groups of stocks, such as state-owned companies and AI-linked stocks, may continue to outperform given policymakers’ focus on these sectors.
“I expect a better second half of the year,” said Frank Benzimra, head of Asia equity strategy at Societe Generale SA, which has had a neutral rating on Chinese equities since November. “From a strategic perspective, we would need a higher risk premium to be comfortable. But from a technical point of view, we could see some recovery.
Still, longer-term expectations for market returns appear modest amid ongoing policy uncertainty and doubts over China’s ability to resume its former pace of economic expansion and industrial growth.
The recovery in corporate profits is also starting to look shaky after a lukewarm first quarter. Earnings expectations for the MSCI China gauge are down 4.7% from a peak in February as recovery expectations and price wars intensify in some sectors.
“It is the longer-term sustainability of the recovery that worries investors,” Laura Wang, Morgan Stanley’s chief China strategist, told Bloomberg Television this week. “So what we’re seeing here is definitely slower earnings growth than our previous expectation.”
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–With help from Charlotte Yang and Zhu Lin.
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