Investors in China's lagging markets to play defence in 2024

China Resources Mixc Lifestyle Services

12/12/2023 03:00

By Summer Zhen
       HONG KONG, Dec 12 (Reuters) - Investors in Chinese
stocks next year will be seeking out businesses with global
reach or other insulation from an economic downturn, after three
straight years of China underperforming world markets. 
    Companies in defensive sectors such as health, medical
innovation and exporters in the electric vehicles supply chain
and advanced manufacturing, as well as multinationals such as
e-commerce firm PDD Holdings  PDD.O , will top the list. 
    That's despite sell-side analysts turning bullish on China's
broader market for next year, with Morgan Stanley and Goldman
Sachs forecasting Chinese equities to outperform the S&P 500. 
    "Since economic recovery is slower than expected, we lowered
exposures which are sensitive to macro cycles," said Wang Qing,
chairman at Shanghai Chongyang Investment Management. 
    Chongyang is instead buying defensive high-dividend stocks,
medical innovators with global competitiveness, and advanced
manufacturing backed by Beijing, Wang said, declining to list
any investments by name. 
    This follows China's blue chip CSI300 index  .CSI300 
sinking to five-year lows and losing 12% over 2023 against a 15%
gain for global stocks  .MIWD00000PUS  as the Chinese economy
struggled with a property crunch and a slow recovery from
COVID-19. 
    Hong Kong's Hang Seng  .HSI  fared even worse, sliding more
than 18% to trade on a forward price-to-earnings ratio below
six, against 21 for the S&P 500  .SPX . 
    Performance over the last 10 months crushed the optimism
that infused the beginning of the year, with four straight
months of foreign outflows in the second half of the year
totalling a net 138 billion yuan ($19 billion) withdrawn from
Chinese equities via the Stock Connect scheme. 
    "Investors (have) struggled to think what the next growth
driver for China will be," said Caroline Yu Maurer, head of
China and specialised Asia strategies at HSBC Asset Management.
    Goldman analysts target 4,200 for the CSI300  .CSI300  by
the end of 2024, up 23% from Monday's close at 3,419. Morgan
Stanley forecasts the blue chip index at 3,850 at the end of
next year and the Hang Seng  .HSI  - which finished Monday at
16,201 - at 18,500, up 14%. 
    In contrast, Goldman sees the S&P 500  .SPX  up less than 2%
from current levels to 4,700 by the end of next year. Morgan
Stanley sees it falling to 4,500.  MKTS/GLOB  
            
    EXPORTERS AND MULTINATIONALS
    Real estate is casting the longest shadow. The sector that
once accounted for a quarter of China's economy is reeling from
a series of developer failures and a crisis of confidence that
fund managers want to see resolved before they commit capital. 
    Moody's slapped a downgrade warning on China's credit rating
last week, in part due to the property malaise. Shares of
Country Garden  2007.HK , once China's biggest private property
developer and now battling to service its debt, are down 73%
this year. 
    The Hang Seng index of mainland developers  .HSMPI  is down
44%. 
    With the property shock ricocheting through the economy and
dampened consumption, Morgan Stanley estimates the number of
MSCI China companies missing analyst earnings expectations in
the third quarter was the most since 2018. 
    New York hedge fund Indus Capital Partners is among several
investors turning away from exposure to China's domestic demand.
    We see value in "some exporters and multinationals, and
cheap (state-owned enterprises) aligned with and otherwise not
of great concern to the government," said Indus partner John
Pinkel, without naming specific companies. 
    The stock of PDD, which owns U.S.-based shopping app Temu,
for example, is up 75%. Discount retailer Miniso  9896.HK  also
has a global footprint and its shares are up 80% this year. 
    Global asset manager Invesco is overweight on Chinese assets
in its Asian portfolios, and strategist David Chao highlighted
the attractiveness of global expansion, citing the success of
Japanese companies abroad while growth slowed at home. 
    To be sure, there are bargain hunters. 
    Wenli Zheng, a portfolio manager at T. Rowe Price, says
shipmakers have record orderbooks and the timing is ideal to buy
good but perceived economically sensitive companies that are
trading cheaply, such as Kanzhun  2076.HK , a recruiter, or mall
operator China Resources Mixc Lifestyle  1209.HK . 
    Jefferies said it has turned "tactically positive" on China
given an appreciating yuan and cheap valuations, and LSEG data
shows sellside analysts think Chinese firms will see their
strongest earnings expansion in seven years in 2024. 
    Yet BofA Securities' November survey of 265 Asia fund
managers found a majority are either waiting for improvement or
looking elsewhere, suggesting no rush to add to their exposure
to China. 
    
    ($1 = 7.1872 yuan)

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Chinese stocks' dour year    https://tmsnrt.rs/3t3AG3I
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 (Reporting by Summer Zhen; Additional reporting by Samuel Shen
in Shanghai; Editing by Tom Westbrook and Tom Hogue)
 ((summer.zhen@thomsonreuters.com; 852-3462-7739;))