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  • Why Do Chinese Stocks Keep Faltering?

Why Do Chinese Stocks Keep Faltering?

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Bloomberg Jul 9, 2024 15:00 · 18.6k Views

BofA Securities China Equity Strategist Winnie Wu says that's due to a combination of factors, including pressures on China's economy and company earnings, as well as a tense geopolitical environment. She says investors should trim SOE holdings and add quality beta stocks.

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Transcript

  • 00:00 Why does this market
  • 00:02 keep faltering?
  • 00:04 Yeah, I think if we look at the different drivers, right, the macro factor, the dividend, the earnings, the external factors and the policy
  • 00:13 macro data, first quarter surprise on the upside, right?
  • 00:16 So that's when sales that were upgrading GDP forecast.
  • 00:19 But in May, June, the data actually sequentially start to weaken, especially when we look at the consumer confidence, look at some of the retail sales data,
  • 00:28 dividend, which was the best performing strategy in first half this year.
  • 00:32 But many SO ES actually ex dividend in June, July in middle of the year.
  • 00:37 Yeah.
  • 00:37 And many of them do not pay interim or won't pay interim until like January, February next year, which means there's no dividend payout in the next six months or so.
  • 00:47 So that pillar is also kind of fading away, at least for the very near term
  • 00:52 earnings.
  • 00:52 We're going to get earnings in the next month or so.
  • 00:54 As I said previously, consensus forecasting 14%
  • 00:59 and I think it's probably going to be mid low single digit.
  • 01:02 So I think there's still significant downside for earning revision
  • 01:05 and external factor as we're getting into the busy election season toward the second-half of the year, the geopolitical tension only get worse, the tariffs, this
  • 01:15 protectionism.
  • 01:16 So finally the only thing that can support a market to retest the main high
  • 01:22 is probably policies,
  • 01:24 right?
  • 01:24 So I think the next week is a key thing, political event is a key thing.
  • 01:27 Markets watching if there's positive catalyst market could go up 1015% to retest the high in May.
  • 01:34 But you know, for no event or disappointment market could retest the mid-april lows.
  • 01:40 And what are expectations now on the plenum?
  • 01:42 Is it just
  • 01:43 low?
  • 01:45 What were people saying to you?
  • 01:46 I think expectations are not high, right?
  • 01:48 But still I know like hedge fund investors see that as a potential policy put so they unwilling to short ahead of the platinum.
  • 01:56 But if platinum confirms to be more neutral to negative catalyst for the market in the near term, this might become a catalyst for sale.
  • 02:04 Well, what, what do you want to hear?
  • 02:06 What, what, what will be potent enough to get us that 1015% upside?
  • 02:10 Yeah.
  • 02:11 So I think from market investor concern perspective, property market, right, previously there were high expectations on destocking on some sort of national platform, which didn't realize in the May 17th policy package.
  • 02:23 So you know, many investors were asking why not, right, what are they waiting for?
  • 02:27 So I think continued effort to to drive the property in terms of destocking instead in terms of stabilizing the expectations on property prices are still very, very important.
  • 02:38 People also care about employment, consumer confidence, right.
  • 02:41 So you know, any effort to promote new growth drivers who promote employment that's important for consumption and for property home buying confidence as well.
  • 02:51 And finally, I think you know, externally they are more concerns about tariffs and overcapacity and price war deflationary pressure.
  • 03:00 So what China is going to do ahead of you know, in light of these external trade tensions and to address some of the overcapacity issue in different parts of its economy.
  • 03:10 So let's talk about performance.
  • 03:12 I mean the second quarter you, you, you saw
  • 03:14 pretty good performance, but comes what
  • 03:16 you mentioned SOEs, I mean part of that is the utilities, the financials
  • 03:20 is that,
  • 03:21 are you saying that now it's time to trim those?
  • 03:23 What are you looking at for the third quarter now?
  • 03:24 Yeah.
  • 03:25 So we're saying taking a pause in the SOE strategy, right.
  • 03:29 Previously when I start to talk about the barbell, one side is the defensive SOEs in January last year,
  • 03:35 generally overseeing master do not believe it said no, no, no, no, we don't do so definitely not SOE banks.
  • 03:41 But
  • 03:42 18 months later now I think we become very consensus.
  • 03:46 Even when I was marketing in the
  • 03:47 US in true, you know the EM loan only in New York City, in San Francisco, they all
  • 03:52 own SOE banks,
  • 03:54 right and some other SOE.
  • 03:55 So one, I think position has become a bit crowded
  • 03:59 that it's a very, very consensus strategy.
  • 04:01 And two, as I mentioned, you know, banks as a sector, telco as a sector were up 20% year to date and oil and gas were up 40%.
  • 04:09 So after the share price rally, dividend yield actually declined.
  • 04:13 There were banks as a sector were using 10% in January low,
  • 04:17 now the yield is less than 7% and many of the stock yielding only 5-6 percent.
  • 04:22 So yield become less attractive.
  • 04:23 But also timing wise,
  • 04:25 you know they just ex dividend right in the past few weeks and the next payout is probably a well way.
  • 04:31 Now some sectors like oil and gas, like telcos, they pay intermittent in September.
  • 04:36 So there's some support for specific stocks.
  • 04:38 But majority would not have payout in the next six months.
  • 04:42 So what?
  • 04:43 What is an easy sell now where
  • 04:46 positioning may or may not be crowded
  • 04:48 and
  • 04:50 you're still getting investors welcoming the idea with open arms?
  • 04:54 For example,
  • 04:57 I think you know I got a lot of pushback on the SOE.
  • 05:00 Taking profit
  • 05:01 story, so people still want to own SOE.
  • 05:04 Our advice is for investor to add quality beta on the low.
  • 05:08 So for example, some of the Internet names, they are getting into the lower bound
  • 05:12 a lower range of the trading band, right?
  • 05:14 And I think the worst in terms of flow derating is probably behind.
  • 05:18 So I would selectively add
  • 05:20 the Internet names,
  • 05:22 consumer, I think people are becoming much more bearish, more concerned on the consumer names.
  • 05:27 They're willing to pick very small specific niche names within consumer.
  • 05:31 But the large cap names like the liquors, you know, there's
  • 05:35 a lot of times,
  • 05:36 yeah,
  • 05:37 yeah.
  • 05:38 You mentioned about earnings projections at 14% still high.
  • 05:41 You're saying it's what single digits or so low single digits?
  • 05:44 Where, where are we going to see that
  • 05:46 mismatch, that displacement you think?
  • 05:48 Yeah, when the sector what gets revised lower?
  • 05:50 Yeah,
  • 05:50 yeah.
  • 05:51 So you know, earning revision actually became positive in May, June.
  • 05:55 I guess one is partly because Internet were reporting earnings in May and Internet earnings bottom line was generally OK.
  • 06:02 But also I suspect that's partly to to, to do with market rally in April, May that you know, sales that need to justify the pure upside.
  • 06:10 So there's more optimism in terms of earnings upward revision, which apparently you know the rally didn't sustained as of now.
  • 06:17 So
  • 06:18 I think in the,
  • 06:20 the, the, the July, August the first half earnings season, we are probably going to see pretty broad based earnings standard.
  • 06:26 Are you looking at or
  • 06:28 just looking at the macro picture and the possibility that hopefully they deliver pro growth stimulus?
  • 06:34 Is there anything on the monetary side that you think might be
  • 06:38 on deck that they could deliver big enough, whether that's yield curve control or all the conversations recently
  • 06:43 that might spread the market into an awakening?
  • 06:47 Very unlikely.
  • 06:48 I think
  • 06:49 there's a lot of conflicting goals right for them.
  • 06:51 Defending the currency stability is probably a very high priority
  • 06:55 and the falling bond yield, the falling interbank market rate is certainly adding pressure to the currency.
  • 07:00 So for the short term, there are
  • 07:02 very, very unlikely to do big policy bazooka or or or big stimulus on the monetary side.
  • 07:08 Also they need to reserve policy tools for potentially January next year, right?
  • 07:13 What if the
  • 07:14 US election resulted in a sharp
  • 07:18 increase in trade tariffs, 60% blanket tariff.
  • 07:21 They need to reserve some policy tools for first half next year
  • 07:25 and from now, for now, you know, GDP data are okay, right And the stock market are doing okay.
  • 07:31 So, you know, I guess from policymaker perspective, there's not much sense of urgency or sense of crisis that they have to do the bazooka.
  • 07:37 Now.
  • 07:38 You
  • 07:38 mentioned about the election risk.
  • 07:40 Did
  • 07:41 the latest presidential debate change your mind in any way or is your team at least gaming out scenarios
  • 07:46 of what November is going to look like now for Chinese markets?
  • 07:51 Yeah, I think, you know, directionally it's probably very consistent, right?
  • 07:56 Whichever party wins the direction is very consistent in terms of areas that they focusing on,
  • 08:00 you know, AI, semiconductor, bio, security, biotypes, things like that.
  • 08:05 But I think it's more about consistency versus and predictability, right?
  • 08:10 And currently, we're looking at probably higher policy and predictability, potentially more chaotic, less,
  • 08:17 less disciplined
  • 08:20 new policies coming out in January or first quarter next year.
  • 08:23 That's why China probably need to have better preparation.