Morgan Stanley likes these Chinese stocks despite a country downgrade
Uncertainty is mounting for China’s huge emerging market equity class. Morgan Stanley has decided to pause and downgrade the MSCI China to the same weighting while recommending some consumer and industrial stocks. On the other hand, there is a growing number of calls to buy when prices are falling. “A lack of rapid implementation of actionable easing measures could cause sentiment to deviate from the early recovery,” Morgan Stanley equity strategists Laura Wang and Fran Chen said in an Aug. 2 note. Chinese stocks have edged up slightly over the past two weeks. Since the Politburo meeting of China’s leaders on July 24, various levels of government have stepped up announcements of support for the property market and consumption. The Politburo meeting signaled policy easing, but outstanding issues — debt, housing, jobs and geopolitics — would need major improvements for sustained inflows, Morgan Stanley analysts said. “Our data shows that by the end of June, all the additional inflows from various global mutual funds into the Chinese stock market had decided to exit,” the analysts said. All of this contributes to the growing caution towards China. Ark Invest’s Cathie Wood has sold China investments in a major fund, while Warren Buffett has reduced his stake in Chinese electric car giant BYD. US politicians are also putting pressure on. The US House of Representatives’ Select Committee on the Chinese Communist Party said last week it had sent letters to asset management giant BlackRock and index giant MSCI to probe their links to US investments in blacklisted Chinese companies. It is not clear what restrictions, if any, apply to such investments. But it says the Biden administration is considering an executive order to ban certain investments as well. China’s growth prospects The reason for investors’ negative sentiment towards China so far is not the sanctions but the disappointing economic growth, said Liqian Ren, head of quantitative investments at WisdomTree, which has a China ETF that excludes state-owned companies. CXSE YTD Line YTD Performance for the WisdomTree Trust China ex State Owned Enterprises ETF (CXSE) For WisdomTree’s clients who invest in China, many do “in the sense of long-term contrarian trading.” [that] “In the long term, China will still make a remarkable achievement in terms of broad technological progress,” Ren said. “Many customers still believe China can grow over 4% in the next decade.” Gross domestic product in the second quarter fell short of expectations but still posted 6.3% year-on-year growth. Youth unemployment hit a new record while real estate investment continued to fall. Wall Street investment banks changed their China forecasts several times this year, with JPMorgan adjusting them six times. Morgan Stanley has done so. It has changed only once so far this year: a cut to 5% in July. The investment bank had set an overweight for China equities on December 4, 2022. Since then, analysts at Morgan Stanley pointed out that MSCI China and Hang Seng have returned 8.6% and 10%, respectively — in line with the MSCI Emerging Markets Index return of 9.6% as of August 1, 2023 Analysts expect Chinese stock market volatility to remain relatively high due to swings in investor hopes and disappointments, according to government guidance. “We believe the right approach is to remain on the sidelines, taking advantage of the recent improvement in sentiment and waiting for a better entry point in the future,” the report reads. Earnings Details Coming Up Meanwhile, big corporate earnings could shed some light on the business environment in China over the next few weeks. Alibaba is expected to release its earnings on August 10th. Tencent and JD.com will both report the following week, while Baidu will release its results on August 22nd. Jack Ma’s Alibaba has been the poster child for a surge in US interest in Chinese investment. Meanwhile, the stock is trading close to where it was shortly after its 2014 IPO. Increasing regulatory scrutiny and the economic slowdown have seen large US-backed venture capital inflows into Chinese companies halted. Alibaba is still part of Morgan Stanley’s China/Hong Kong focus stock list. And despite the downgrade of Chinese stocks, analysts have added two mainland-traded A shares to their focus list. Jonjee Hi-Tech – Thanks to management and board changes, the spice company’s sales are expected to grow into double digits in the coming years, up from 5% over the past three years. The stock has upside potential of around 28% from analysts’ target price. YTO Express – The express delivery company is one of the few in the industry with healthy free cash flow and a strong net cash position, analysts point out. The shares have upside potential of about 17% versus Morgan Stanley’s price target. Outside of certain names, however, it can be difficult to build a broader investment thesis in China based on just a few short-term signals. In their latest report, Morgan Stanley analysts also overweighted India. WisdomTree’s Ren doesn’t expect US sanctions on China to end. At the same time, she pointed out that “China can continue to develop because China is currently probably the only emerging country with broad technological advances in all industries.” The WisdomTree China ex-State-Owned Enterprise Fund (CXSE) is this year down more than 3% so far. Its largest holdings are Alibaba, Meituan and Ping An Insurance Group. Looking ahead, Ren doesn’t expect significant momentum based on her reading of top-level politics and the way entrepreneurs think about investing. And she doesn’t think China is in an extreme situation similar to that of the Covid-19 pandemic or 1978, when a lack of change would plunge China into a crisis. “In general,” Ren said, “I don’t think China is in crisis.” — CNBC’s Michael Bloom contributed to this report.
https://www.cnbc.com/2023/08/06/morgan-stanley-likes-these-chinese-stocks-despite-a-country-downgrade.html Morgan Stanley likes these Chinese stocks despite a country downgrade
