As the summer holidays come to an end, investors in China are facing the harsh reality that consumption and growth within the country will continue to be sluggish for the foreseeable future. JPMorgan recently downgraded its opinion on Chinese stocks from overweight to neutral, citing a challenging outlook. Although the firm still holds 18 China stocks in its global emerging markets model portfolio, there is a clear shift in sentiment towards other emerging markets instead.
Chinese policymakers have acknowledged the softness in domestic demand, but there has been a lack of meaningful action to boost consumer sentiment. The uncertainties surrounding the China economic outlook range from tensions with the U.S. to lingering deflation pressure. Consumer prices in China have barely risen in the last year, primarily due to the real estate slump and concerns about future income. The upcoming consumer price index for August is expected to have only risen by 0.7% on an annual basis, according to analysts polled by Reuters.
In addition to JPMorgan, Nomura also downgraded MSCI China to neutral from overweight, citing consistent disappointments in the lack of meaningful measures to support the economy and the property sector. Concerns about the upcoming U.S. elections adding further pressure on the market were also highlighted. Despite the attractive valuations and short-term rally possibilities, China stocks have not been rated underweight due to stimulus expectations.
While U.S.-China relations have stabilized over the past year, there is still uncertainty surrounding the upcoming U.S. presidential election in November. The recent visit of U.S. national security advisor Jake Sullivan to Beijing emphasized the importance of high-level communication to manage the bilateral relationship responsibly. This uncertainty has led Beijing to hold off on domestic stimulus measures.
JPMorgan’s updated global emerging markets model portfolio includes internet-related names like Alibaba, Tencent, Kuaishou Technology, and Meituan, all rated overweight. However, only one Chinese stock, Kuaishou, makes it to both the growth and value lists. Despite the overall downturn in Chinese stocks this year, Kuaishou has shown promise with revenue and earnings exceeding expectations in the second quarter.
The future of Chinese stocks is riddled with uncertainties and challenges. Investors need to carefully analyze the market landscape and consider the potential risks before making any investment decisions. The upcoming U.S. presidential election, trade tensions, and domestic economic policies will continue to influence the performance of Chinese stocks in the months to come. It is essential to stay informed and be prepared to adapt to the changing market conditions.