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More and more international investment analysts say it’s time to buy mainland Chinese stocks, ahead of expected government support for growth. On top of the pandemic’s drag on the economy, heightened regulatory uncertainty since last summer has generally kept foreign investors cautious on Chinese stocks.
“Monetary policy is being eased [in China] while elsewhere it is being tightened,” its global strategist Andrew Garthwaite and his team wrote in the late January report. “Economic momentum is turning up.”
One of the early positive turns on mainland Chinese stocks came from BlackRock Investment Institute in late September. As 2022 got underway, other firms also made similar calls, while others remain neutral.
On the political front, Credit Suisse expects regulatory uncertainty to subside after a national parliamentary meeting in March, and remain muted — at least until after the ruling Chinese Communist Party’s 20th National Congress in the fourth quarter.
Financial factors, such as how much the stocks have fallen compared to their potential ability to deliver earnings, also contribute to analysts’ positive turn on Chinese stocks.
Bernstein: China is ‘uninvestable’ no more
In January, Bernstein released a 172-page report titled “Chinese Equities: ‘Uninvestable’ No More.” “We believe there is a case to add back China exposure to global portfolios due to six key reasons,” analysts at the investment research firm said.
They pointed to expectations for growth in new financing, easier monetary policy and more attractive stock valuations relative to the rest of the world. Other factors included a rare opportunity to pick stocks, growing foreign inflows and increased earnings.
HSBC: Investors too bearish on China
The Shanghai composite has climbed 2% since the Lunar New Year holiday, which was from Jan. 31 to Feb. 6 this year. Those gains follow a drop of 7.65% in January, the worst month for the index since October 2018, according to Wind Information data.
Yes, China is struggling with growth and a stronger USD is not good news for China’s stock markets. But that’s now well-known and is priced in.
“Investors are too bearish about China stocks,” HSBC analysts wrote in a Feb. 7 report that affirmed its call in October to upgrade Chinese stocks to overweight.
“Yes, China is struggling with growth and a stronger USD is not good news for China’s stock markets,” the analysts said. “But that’s now well-known and is priced in. Even good, blue-chip stocks are now trading at attractive valuations.”
The bank’s analysts forecast 9.2% gains this year for the Shanghai composite, and 15.6% for the Shenzhen component index.
Goldman: A-shares are now ‘more investable’
Goldman Sachs forecasts 16% in gains for the MSCI China index this year as valuations remain below the Wall Street bank’s target of a 14.5 price-to-earnings ratio, its chief China Equity Strategist Kinger Lau said in a Jan. 23 report.
On Sunday, Lau and his team released an 89-page report about “why China A-shares have become more investable for global investors.” Their reasoning for investment in the world’s second-largest stock market is based largely on greater accessibility for foreign investors and under-allocation to the share class so far.
UBS: From ‘underweight’ to ‘overweight’
In late October, UBS announced it was upgrading Chinese stocks to “overweight,” up two notches from an “underweight” call in the summer of 2020.
In another sign of the firm’s optimism, the emerging markets strategy team said in January its highest-conviction stock ideas include many Chinese internet names like Alibaba that have been the target of Beijing’s new regulation on alleged monopolistic practices and data security.
Not everyone is a China bull
However, not all international investment firms are as optimistic.
Morgan Stanley’s Asia emerging markets stock strategy team is neutral on mainland China, as are Bank of America and J.P. Morgan Asset Management.
During past years of stimulus, China hasn’t always seen a bull market, Winnie Wu, China equity strategist, BofA Securities, said in a phone interview Monday. While there are investment opportunities within certain sectors, she expects corporate earnings growth across China to decelerate.
Wu pointed out that in 2016, despite expectations of stimulus, stocks only began to climb after the second quarter. The Shanghai composite closed 12.3% lower that year.
Risks from regulation, the property market
A sell-off in mainland shares so far this year reflects how investors have generally remained cautious on Chinese stocks.
Even in upgrades, firms like BlackRock have used conservative language like turning “modestly positive” and cautioned that:
“Given the small benchmark weights and typical client allocation to Chinese assets, the allocation would have to increase by multiples before they represent a bullish bet on China, and even more for government bonds.”
While the policy remains “the big unknown,” Garthwaite noted official remarks — such as Xi’s speech at the World Economic Forum in January — indicate an easier stance going forward.
“The common prosperity we desire is not egalitarianism ... we will first make the pie bigger and then divide it properly through reasonable institutional arrangements,” Xi said at that time. “All types of capital are welcome to operate in China.”
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