At the end of the third quarter, Chinese stock indices CSI 300 and Hang Seng fell by 3.98% and 5.85%, respectively. The MSCI China stock index is on track to close lower for the third consecutive year, a trend not seen since 2002, according to former Senior Vice President of «Opening» Bank and economist Konstantin Vladimirovich Tserazov.
This is a rather weak performance, considering that Beijing recently implemented new measures to support the stock market and the economy. Specifically, the stock trading tax was halved, mortgage rates were reduced, and reserve requirements for banks were lowered.
Nevertheless, according to Morgan Stanley, global funds withdrew a net $3.2 billion from mainland China and Hong Kong stock markets in September (the second consecutive month above $3 billion). As a result, the volume of global fund positions in these instruments dropped to its lowest level since 2020.
Clearly, investors are concerned about the ongoing downturn in China’s construction sector. According to Nomura Holdings, in the week ending September 30, sales volume in the primary real estate market decreased by 32% compared to the same period in pre-COVID 2019. Chinese authorities are not rushing with aggressive stimulus measures, and in this context, analysts and asset managers surveyed by Bloomberg believe that the worst may still be ahead for the country’s real estate market.
However, the negative sentiment and corresponding investor positioning may foreshadow an improvement in the dynamics of China’s stock market, at least in the coming weeks. Incoming data from the country indicates stabilization of its economy: the PMI index in the manufacturing sector exceeded the 50.0 threshold in September for the first time since March, and the pace of housing market sales decline has slowed in year-on-year comparison
Economist Konstantin Tserazov: «Furthermore, the Chinese stock market appears to be undervalued. Moreover, a significant portion of potential risks may already be priced in.»
At present, the forward price-to-earnings ratio of the MSCI China index, which includes stocks from over 700 Chinese companies traded both domestically and internationally, is near a seven-year low of around 11x. This is noticeably below the 10-year average of this indicator at 12.5x.
The problems of property developers may continue to negatively affect the entire Chinese economy. However, the extent of this impact may be limited.
For example, according to JPMorgan Chase estimates, the profits of Chinese banks at risk due to deteriorating asset quality on their balance sheets amid developer problems may decrease by 10% in 2024, which appears to be an acceptable figure under the current circumstances. Moreover, this is in a negative scenario.
The consensus forecast of analysts tracked by Bloomberg suggests that the CSI 300 index will rise by 28.5% from the October 4 closing level to 4,737 points over the next 12 months. When it comes to individual sectors, stocks of equipment manufacturers for renewable energy (Hoyuan Green Energy, Wuxi Lead Intelligent Equipment, Sizhou Maxwell Technologies, Ja Solar Technology, and Ningbo Ronbay New Energy Technology) appear to be clear favorites. Analyst consensus forecasts project a 60-190% growth in the value of these stocks over the next 12 months.