Veteran Chinese stock analysts wary of green energy shares amid multiple headwinds

The current levels of institutional allocations to green energy stocks are the ‘most extreme in the history of China’s A-share market’, Soochow Securities analyst says

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A BYD EV is displayed at the Chengdu Motor Show 2022. New energy stocks such as those of electric carmakers will probably fall further, an analyst says. Photo: Xinhua

Published: 8:30am, 19 Sep 2022

Veteran stock analysts have become cautious about Chinese green energy bets because of fund managers’ record-high holdings, slowing gains in fossil fuel prices and geopolitical risks.

Fund managers’ record-high holdings of green energy stocks makes them susceptible to sell-offs. Trade in such shares from electric vehicles (EVs) and lithium-ion battery makers to wind and solar power equipment manufacturers has remained crowded over the past three months, with interim reports showing that mutual fund managers ploughed a record 40 per cent of their assets into the sector, said Chen Li, chief global strategist at Soochow Securities in Shanghai.

“I am cautious about these stocks in the short term,” he said. “The [current] proportion of institutional allocations to the sector is the most extreme in the history of China’s A-share market. And, of course, valuations are also elevated.”

A gauge of 402 green energy stocks has risen 41 per cent from a nadir in April, outperforming a 3.9 per cent gain on the CSI 300 Index in the time span. It is one of the few sectors that has withstood a recent broad-based sell-off, as traders increasingly fret over China’s growth outlook. Beijing’s adherence to a rigid zero-Covid policy and a deteriorating property market, which is estimated to account for about a quarter of the economy, have been highlighted as major factors keeping risk appetites at bay.

Moreover, money managers love green energy stocks because clean energy is among the few industries that can still get a tailwind of policy support from top policymakers in Beijing, who have set a target of achieving carbon neutrality by 2060. Regulatory risks have been among fund managers’ key considerations while picking stocks over the past two years. Beijing has upended fast-growing industries such as e-commerce and after-school tutoring because of Chinese President Xi Jinping’s common prosperity goals. The regulatory crackdown, while on the milder side this year, is still under way.