As the summer holidays draw to a close, investors in China are faced with the harsh reality of a sluggish consumption and growth prospects in the near future. JPMorgan recently downgraded its opinion on Chinese stocks to neutral from overweight citing a challenging outlook. This pessimistic view was further reinforced by Nomura’s demotion of MSCI China to neutral from overweight, adding to the growing concerns about the overall economic landscape in China.
Chinese policymakers have acknowledged the softness in domestic demand but have failed to take meaningful action to boost consumer sentiment. The consumption and real estate sectors are particularly affected by domestic concerns, leading to a lack of bottom-up stock picking opportunities. The real estate slump and worries about future income have contributed to the drag on consumer prices in China, which have barely risen in the last year.
While U.S.-China relations have stabilized in recent times, uncertainty surrounding the U.S. presidential election in November has prompted Beijing to hold off on implementing domestic stimulus measures. The U.S. elections are seen as a potential overhang for the market as analysts anticipate the outcome and its implications on the bilateral relationship between the two economic giants.
Despite the overall pessimism surrounding the Chinese economy, JPMorgan still holds 18 China stocks in its global emerging markets model portfolio. The bank is focusing on select Internet names for growth potential and rising shareholder returns, as well as AI thematic plays once the current consolidation phase is completed. Nomura, on the other hand, noted attractive valuations and the possibility of short-term rallies as reasons for not cutting China stocks to an underweight rating altogether.
When it comes to JPMorgan’s emerging markets growth and value picks, only one Chinese stock makes both lists – Hong Kong-listed short video company Kuaishou. The video app, a competitor to TikTok owner ByteDance, reported impressive revenue and earnings for the second quarter, beating analysts’ expectations. JPMorgan has a bullish price target on Kuaishou, implying a significant upside from its current price. The bank selects its value stock picks based on cash flow and upside potential, while growth stocks are identified based on historical and expected sales increases.
The outlook for the Chinese economy remains challenging with concerns about sluggish growth, soft consumer demand, and real estate market woes. The impact of U.S.-China relations and the upcoming U.S. presidential election further add to the uncertainty surrounding the market. Despite the cautious approach taken by some investment firms, there are still opportunities for growth and value investments in select Chinese stocks. Investors will need to closely monitor the evolving economic landscape and geopolitical developments to make informed decisions in the coming months.