As summer comes to an end in China, investors are facing the harsh reality that consumption and growth in the country will continue to be sluggish in the near future. JPMorgan recently downgraded its opinion on Chinese stocks to neutral from overweight due to what they describe as a challenging outlook. The team at JPMorgan led by emerging markets equity strategist Pedro Martins increased its recommendations on other emerging markets while still holding 18 China stocks in its global emerging markets model portfolio. The preference for select Internet names was highlighted by the analysts, focusing on growth at a reasonable price and rising shareholder return basis, as well as AI thematic plays after the current consolidation completes. However, the Consumption and Real Estate sectors in China are still facing challenges with limited stock picking opportunities, according to the JPMorgan team.
Chinese policymakers have acknowledged the softness in domestic demand, but there has been a lack of meaningful action to boost consumer sentiment. Uncertainties surrounding the China economic outlook range from tensions with the U.S. to lingering deflation pressure within the country. Unlike the U.S., consumer prices in China have barely risen in the last year, impacted by the real estate slump and concerns about future income. The Consumer Price Index for August in China is expected to have risen just 0.7% on an annual basis, reflecting the challenges faced in the Chinese economy.
JPMorgan’s downgrade of Chinese stocks follows Nomura’s demotion of MSCI China to neutral from overweight. The lack of meaningful measures to support the economy and the property sector in China has led to consistent disappointments, according to Nomura’s Asia ex-Japan equity strategist Chetan Seth. Concerns about the U.S. elections proving to be an overhang for the market have been raised by the analysts at Nomura. Despite attractive valuations and the possibility of short-term rallies spurred by stimulus expectations, China stocks were not cut to an underweight rating, highlighting the cautious approach taken by investors in the current economic climate.
The stabilization of U.S.-China relations in the past year has been noted, but analysts point to the uncertainty surrounding the U.S. presidential election in November as a reason for Beijing holding off on domestic stimulus. The recent visit by U.S. national security advisor Jake Sullivan to Beijing for official meetings further highlights the importance of high-level communication between the two nations in managing their bilateral relationship. The past trade tensions between the U.S. and China have had a significant impact on the MSCI China index, with the utilities sector in China outperforming during those times, showcasing resilience in the face of economic challenges.
As part of JPMorgan’s China stock downgrade, shares of state-owned utility operator CR Gas were added while others like PDD, China Construction Bank, and Kingdee International were removed. The updated global emerging markets model portfolio includes internet-related names like Alibaba, Tencent, Kuaishou Technology, and Meituan, all rated overweight by JPMorgan. Only one Chinese stock, Kuaishou, makes it to the list of emerging markets growth and value picks by JPMorgan, reflecting the challenges faced by the Chinese market. Kuaishou, a short video company listed in Hong Kong, has shown promising revenue and earnings for the second quarter, with potential for growth in the future.
The slowdown in Chinese consumption and growth reflects the challenges facing the economy as investors navigate through uncertain times. Policymakers’ response to domestic demand, the impact of U.S.-China relations, and the evolving stock picks and recommendations by investment firms all contribute to the complex landscape of the Chinese market. As the economic outlook remains uncertain, it is essential for investors to carefully analyze the risks and opportunities before making decisions in the ever-changing environment.