The need for more action may have been seen.
Since hitting its high in February 2021, the MSCI China Index has lost more than $2 trillion in market capitalization, with more than 50% of exchange-traded iShares MSC China (MCHI).
China** is currently one of the cheapest markets in the world, with the MSCI China Index trading at nearly 12 times earnings, compared to 15 times for the MSCI Emerging Markets Index and 20 times for the MSCI World Index.
Some managers believe that China is now very cheap and ready, and that a bottom is emerging as policymakers roll out measures to stabilize the economy. However, some investors remain concerned about structural challenges affecting China's long-term growth prospects.
Howie Schwab, manager of Driehaus Emerging Markets Growth, said: "The baseline has now fallen and will only move further lower if the situation deteriorates further, and if that doesn't happen, it could trigger involuntary short-covering, a bit like short-covering of unprofitable speculative tech stocks in the U.S. in mid-2023 when investors panic about rising interest rates." ”
The magnitude of short covering may be smaller than that of the market at the end of 2022 when China eased its epidemic prevention and control measures, but China is still likely to rise by 10%, just like Japan did during the period of deflation.
Other analysts share similar views. Michael Hartnett, a strategist at Bank of America, called China "the world's most attractive contrarian long." As China** introduced more measures to stimulate economic growth, nearly $12 billion flowed into the world's second-largest economy over the past week.
In order to boost loan demand, China's central bank recently announced a cut in the reserve requirement ratio by 0.50%, double the usual amplitude, while requiring domestic financial institutions to support cash-strapped property developers.
At the same time, some ** made statements of pledge support**, and there were also reports that China may launch a plan to guide the "national team" ** A shares. Ramiz Chelat, strategist at Vontobel Emerging Markets, believes that all of this suggests that the need for more action may have been seen. Cherat has recently selectively increased his holdings in China**, but China** is still underweighted compared to his benchmark.
"This is a short-term bottom and support, and to achieve sustainability, more substantial consumption stimulus measures need to be introduced, or the local ** debt problem is resolved," Cherat said. ”
Cherat noted that he would like to see fewer downward revisions to earnings expectations in some sectors in China. It may take some time for earnings prospects to improve in strategic areas where China has invested heavily, such as semiconductors and renewables, which are currently facing problems such as overcapacity and declining.
Others would like to see more coherence in China's policies to address structural issues such as debt and demographics, while taking action to reinvigorate confidence in the private sector.
Uncertainty over economic policy has caused fluctuations in investor sentiment. The tightening of the prevention and control measures and regulatory environment during the epidemic had put pressure on the company, and then the policy changed, and after saying that it had relaxed the regulation of the technology industry, ** introduced a draft regulation to limit the excessive use and high consumption of games, which put pressure on Internet stocks.
So, beyond the supportive rhetoric, investors want to see more and clearer policy signals, especially if they have been restrained in rolling out stimulus.
Rosalea Yao, a real estate analyst at G**Ekal, recently pointed out that in the past few years, China's real estate sales have fallen from 18 trillion yuan to 12 trillion yuan, and the situation of real estate *** still exists, so more measures need to be taken to stabilize the real estate industry.
Measures to attract home buyers have had limited effect on boosting the property market. In addition, while localities are encouraged to convert unfinished or idle projects into affordable rental and housing for sale, Yao noted that developers facing a lack of capital need external funding.
The stabilization of the real estate market, which accounts for a quarter of China's economic activity, is seen as a prerequisite for a sustained and comprehensive economic recovery.
Vivian Lin Thurston, manager of emerging markets growth strategy at William Bluair, said: "China is currently oversold, and the first phase may be driven by technical factors, but ultimately investors need to see a further full recovery. ”
Thurston said she has devoted more time to China**, but before taking action, she would like to see more signs of economic recovery, such as existing and new home sales stabilizing after a two-year decline.
Text |Reshma Kapadia
Edit |Guo Liqun
Copyright Notice: Barron's original article, without permission, may not**. For the English version, see January 27, 2024 ** "China's economic problems drag on." stocks could jump.”。
The content of this article is for informational purposes only and does not constitute investment and financial advice of any kind; The market is risky and investors should be cautious. ）
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