Amundi, Europe’s biggest money manager, is looking past China’s zero-Covid policy to see the brighter side of the stock market, saying concerns about economic growth and earnings are already baked into beaten-down stock prices.
“Valuations are extremely attractive and have already priced in all the bad news on the fundamentals side,” said Alessia Berardi, head of emerging macro and strategy research at Amundi Institute, part of the Paris-based fund manager with US$2.17 trillion of assets. A shift towards stronger policy support “is clearly a trigger to become even more constructive”.
Investors were rewarded for turning bullish on the market after the Hang Seng Index jumped 1.5 per cent in May to halt a three-month slide. The Tech Index, which holds tremendous sway on market mood, climbed 0.3 per cent to reverse a 30 per cent cumulative loss in the past six months.
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The MSCI China Index of 744 stocks trades at 10.1 times 2023 earnings, the cheapest since 2013 when they fetched 9.8 times, according to Bloomberg data. The gauge has declined 17.5 per cent this year, on top of a 21.6 per cent loss in 2021.
The rebound last month may extend as optimism returned after Shanghai ended a two-month citywide lockdown on June 1, allowing carmakers like Tesla to scale up production and logistics players to repair supply-chain breakdowns. That could help recoup US$605 billion of market value lost from this year’s slump in Hong Kong.
“Whether China sticks to its zero-Covid policy is less relevant now, [which] is subject to various interpretations and implementations at the local [government] level,” said Wang Qi, co-founder and chief executive of MegaTrust Investment (HK). “As long as China retains its focus on growth, there should be minimal impact on the economy and financial markets.”
The stringent zero-Covid policy has been blamed for reducing the Chinese economy to a stop-start pattern, with any outbreak or resurgence in infections putting cities at risk of a shutdown. Amundi forecasts China’s economy to grow 3.5 per cent versus China’s 5.5 per cent target, with recent stimulus creating room for improvement in the second half.
Chinese offshore-traded stocks likely reached the bottom in mid-March when prices plunged after analysts at JPMorgan Chase called the tech companies “uninvestable” as a year-long crackdown and Covid lockdowns hit earnings and consumer confidence, making the sector unpredictable.
“Chinese equities are close to the bottom, but it is hard to find a definitive catalyst for the market to stage a more sustainable rerating,” Hyde Chen, head of investment strategy of Haitong International Asset Management, said in an interview. “There is no silver bullet to dissipate all the clouds. Markets want to see more aggressive responses to restore confidence.”
As Beijing is unlikely to forsake its zero-Covid policy in the run-up to the Communist Party’s Congress later this year, the market will continue to face a fat tail risk in terms of unexpected outbreaks and lockdowns, strategists at BCA Research said.
Analysts at Alpine Macro see an opportunistic chance to take a punt at tech stocks as China passed the short-term peak-Covid pain threshold. Goldman Sachs continues to recommend Chinese stocks as cheap valuations and policy backstop put a floor on stock losses.
Positive signs on China’s coronavirus situation have been unfolding. Goldman cited signals such as the approval of domestic oral pills and vaccines’ clinical trials, and the adoption of frequent mass testing that could possibly mean shorter and targeted lockdowns, if needed.
China’s money and credit data surprised on the upside in March, with aggregate financing surging to 4.65 trillion yuan from 1.19 trillion, only to plummet in April to 910 billion yuan as lockdown curbed demand.
“We are becoming more constructive as regulatory crackdown is peaking and credit growth should bottom out soon,” Amundi’s Berardi said. “Mobility and activity data is mildly recovering. Moving forward into the second half, we’re going to see more robust numbers in terms of growth.”
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