Key Takeaways:
- Chinese stock earnings estimates slashed, MSCI China Index down 8%.
- Foreign investors sold $5 billion in Chinese stocks over nine days.
- Analysts remain skeptical despite upcoming political events and buybacks.
What Happened?
Investors in Chinese stocks are growing impatient as the long-awaited earnings recovery has failed to materialize. Earnings estimates for key Chinese equity gauges have been cut more than any other in Asia this year. The MSCI China Index dropped over 8% from its mid-May peak.
Jonathan Garner, Morgan Stanley’s chief Asia equity strategist, noted, “We’ve now seen 11 straight quarters of earnings misses for MSCI China.” The Shanghai Composite Index and the CSI 300 Index saw consensus earnings estimates fall by more than 6% this year, while other Asian benchmarks like India and Japan saw increases.
Why It Matters?
The downturn in Chinese stocks has significant implications for global investors. The sell-off, marked by foreign investors unloading over $5 billion in onshore stocks, signals declining confidence. Ritesh Samadhiya from Bank of America highlighted a structural bearishness among money managers, who are now 6% underweight on Chinese stocks.
The slump affects sectors from e-commerce to real estate, with major internet firms offering massive discounts to attract consumers. The recent market support policies from Beijing, including a property rescue package, have not sufficed to restore confidence.
What’s Next?
Looking ahead, the third plenum in July could be a pivotal moment. Optimists, like JPMorgan’s Wendy Liu, hope this political event will outline significant economic objectives and policy shifts that could buoy the market. However, Alexander Redman of CLSA cautioned that the expected earnings recovery over the next two years is overly optimistic, suggesting investors maintain benchmark weight on Chinese stocks.
The risk remains that if the third plenum’s outcomes are underwhelming, sentiment towards Chinese stocks could turn even more negative, lacking any new catalysts to drive recovery.
