The latest quarterly reports from major Chinese companies have shed light on the unique challenges and opportunities present in the local market. According to Lorraine Tan, director of Asia equity research at Morningstar, there has been a trend of weakness reflecting macroeconomic factors, with cautious guidance across the board. However, certain companies have managed to outperform due to their resilient mix of products or strong market positions.
Alibaba and Tencent, two major players in the Chinese market, reported a significant increase in capital expenditures in the last quarter. This observation by Morgan Stanley China equity strategist Laura Wang suggests a potential turnaround in domestic demand for Chinese data center company GDS Holdings. The company’s first mover advantage in overseas expansion, highlighted by its land agreement in Malaysia, has caught the attention of analysts.
Another Chinese stock gaining exposure to overseas growth is PDD Holdings, the parent company of Temu. Scheduled to report earnings soon, PDD Holdings holds the second-largest weighting in CoreValues Alpha Greater China Growth ETF (CGRO), indicating investor confidence in its growth potential. The ETF, launched in 2023, is managed actively by a team that seeks to trade Chinese public markets more effectively than other passive ETFs.
Despite the promising performance of some Chinese companies, stocks in Hong Kong and the mainland have struggled to recover significantly since the pandemic. Uncertainty about growth and policy, along with concerns about U.S. market stability, continue to weigh on investor sentiment. Ben Harburg, founder of CoreValues Alpha, believes that the market will see outperformance on a name-by-name basis rather than a rising tide scenario.
Looking ahead, analysts are divided on the prospects for Chinese stocks. While some believe that Beijing will not intervene to stimulate growth, others predict that a correction in the overvalued U.S. market could be a catalyst for Chinese stocks. With Japanese and Indian stocks outperforming Chinese stocks this year, there is a sense of hesitancy among investors about the future direction of the market.
The Chinese stock market presents unique challenges and opportunities for investors. Stock picking remains crucial, with certain companies demonstrating resilience and growth potential. Overseas expansion and active portfolio management are key strategies in navigating the complexities of the market. While uncertainties persist, a cautious yet strategic approach can help investors capitalize on the dynamic nature of the Chinese market.