Around the same time that Chinese stocks rose, some investment analysts were quick to point out China’s weaknesses. “China’s recent gains are not justified by fundamentals,” Citi’s emerging market strategists said in a note on Friday, downgrading China while upgrading India. The firm is overweight in Chinese internet, industrial products and technology stocks, but broadly neutral on auto and consumer stocks. Consumer discretionary stocks are expected to have the fastest earnings per share growth of about 29% this year among the sectors, according to a Citi report. After a slow start to 2024, the MSCI China Index has outperformed emerging markets as well as the S&P 500, rising nearly 11% year-to-date. “It looks like a big bull market, but the breadth is not that wide,” said Ding Wenjie, investment strategist for global capital investment at China Asset Management, according to a translation of his remarks in Mandarin by CNBC. Ta. “The capital gains have not been as large as expected,” he said, with hedge funds rather than long-only funds doing much of the buying, and Hong Kong-listed consumer discretionary stocks, mainly in the internet technology sector, being bought. He pointed out that MSCI China’s top holdings are the Hong Kong-listed stocks of Tencent and Alibaba, both of which have recently used excess cash to ramp up share buybacks. “Our strategy has always been very focused on free cash flow,” Ding said, noting the defensive aspects and how recent government capital market policies have emphasized companies’ ability to buy back their own shares. did. Chinese investors are increasingly focusing on free cash flow, a measure of profitability that reflects how much money a company generates excluding operating expenses. Cash can be used to repay creditors or pay dividends to investors. These signs of financial health are important in an economy where growth is slowing after years of rapid expansion, China Merchants Securities said in a webinar on its Wind Information financial platform last week. In an environment of subdued demand, relying on high levels of capital investment can no longer generate significant profits, the brokerage said. The company’s current focus is on finding industry leaders with high free cash flow. Future Earnings Investors will soon know more about the financial health of the most famous companies. Tencent and Alibaba are scheduled to report their quarterly results on Tuesday, while Baidu is scheduled to report on Thursday. Hong Kong-based Alphahill Capital is particularly looking for Chinese consumer names with accretive free cash flow, said Siliang Jiang, partner and portfolio manager at the firm. He noted that the situation surrounding China may have darkened considerably over the past five years, but there is a much larger market that can absorb R&D costs, making China one of Japan’s “lost 20 years.” He said he does not expect it to happen again. Jiang expects that Chinese consumers will start to turn around later this year or next year. A few green shoots are already appearing. China’s Consumer Confidence Index (CCI) has edged up over the past nine months despite falling real estate prices and concerns about a “depressed household balance sheet.” That said, the current CCI value is 89, still well below the pre-coronavirus level. 120,” Bank of America analysts said in a report in late April. “We advise investors to focus on companies that can create value for consumers, including value for money, functional value, and emotional value,” the report says. Two of his picks based on positive free cash flow are Li Auto and New Oriental Education. Analysts also rate Beijing-Shanghai High Speed Rail Operating Company, a state-owned enterprise listed in Shanghai, highly on the basis of future cash flow expectations. They noted that prices could rise while benefiting from increased travel post-COVID-19. Last week, Chinese media reported that many of China’s high-speed rail operators would raise ticket prices by nearly 20% on certain routes, including trips around Shanghai. Ren Lijian, Head of Quantitative Investment at WisdomTree, said state-owned transportation and utility companies have monopoly power and can increase their profit margins by raising prices in China’s current economic environment. . The company has an ETF that tracks non-state-owned Chinese companies. “How long will this tactical rebound last?” [last] “It probably depends on the economic indicators in the coming weeks,” he said. “Given that China hasn’t stimulated much, it means that the Chinese economy is not that bad.” [much] China is scheduled to release key economic data on Friday, May 17 local time, with analysts polled by Reuters expecting retail sales to rise 3.8% year-on-year in April. —CNBC’s Michael Bloom contributed to this report.
