China stock bulls hit reset button after $1.5 trillion plunge

(Bloomberg) — After being caught flat-footed by the crash in $1.5 trillion in Chinese stocks, some of Wall Street’s biggest banks have now settled on a less optimistic consensus.

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Strategists at Goldman Sachs Group Inc., Nomura Holdings Inc., and Morgan Stanley have each lowered their targets for the MSCI China Index by at least 11% over different time periods. Their latest forecasts suggest that while the indicator could recover from its current levels, it will struggle to revisit the January peak, when excitement surrounding the reopening was at its peak.

Such a recalibration comes after a series of data failures that have clouded the economic recovery. Tensions with the US also played a role, while the important real estate market remains in the doldrums. For those who trust the authorities to step up their stimulus measures, the measures so far have been targeted at best.

“At the index level, we honestly expect the Chinese market to remain stationary and grow a bit in the second half of the year, but likely not to offer as much,” said David Wong, senior equity investment strategist at AllianceBernstein Holding LP. There was a reopening push, “but it was more limited than people expected,” he said.

A long position in Chinese equities was the unanimous call from Wall Street banks for 2023 as Beijing’s move away from Covid Zero fueled bets on a speedy recovery. Most strategists went overweight, expecting the MSCI China Index to post a nearly 60% gain from late October to late January.

Even as gains began to fade, few expected the downturn to be so long and so steep. The stock is down nearly 20% since its Jan. 27 peak, losing about $1.5 trillion at the peak of the crash. The Hang Seng China Enterprises Index also fell into a bear market, while the CSI 300 benchmark for mainland stocks erased all of its annual gains.

Making matters worse is the increasing attractiveness of some other Asian markets and the lack of a strong catalyst for China. While hopes for more policy stimulus, including a possible interest-rate cut, are high, a full suite of stimulus promises – which helped reverse the March 2022 slide – are less likely as authorities seek to rein in debt hold.

READ: Help is on the way, just not a big bang from Beijing: China Today

None of this means that China is no longer investable. Goldman Sachs and Morgan Stanley have stuck to their overweight recommendations despite cuts in index forecasts and expect some recovery from here.

Also for some companies like JPMorgan Asset Management and Invesco Asset Management Ltd. valuations are too attractive to ignore. Certain groups of stocks, such as SOEs and those associated with artificial intelligence, may continue to outperform as policymakers focus on these sectors.

“I expect a better second half of the year,” said Frank Benzimra, head of Asia equity strategy at Societe Generale SA, who has been neutral on Chinese equities since November. “From a strategic point of view, we would need a higher risk premium to feel comfortable. But from a technical point of view we could see some recovery.”

Longer term, however, expectations for market returns appear modest, owing to ongoing political uncertainty and doubts as to whether China can regain its earlier pace of economic and industrial expansion.

A recovery in corporate earnings also appears to be faltering after a sluggish first quarter. Prospective earnings estimates for the MSCI China indicator are down 4.7% from the February peak, on weakening recovery expectations and increasing price wars in some sectors.

“It’s the longer-term sustainability of the recovery that worries investors now,” Laura Wang, chief China strategist at Morgan Stanley, told Bloomberg Television this week. “So what we’re seeing here is absolute slower earnings growth compared to our prior expectation.”

READ: China’s bulls retreat as stocks see renewed sell-off

– With the support of Charlotte Yang and Zhu Lin.

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