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A man stands in front of a jumbo screen showing the latest economy and stock exchange data in Shanghai in June 2022. Photo: EPA-EFE

US recession to limit gains in Chinese stocks in 2023 as Shanghai brokerage cautions bullish market views

  • Recession in the US will crimp demand for Chinese goods and slow any recovery in corporate earnings, Shenwan Hongyuan says
  • Fed policymakers signalled they are not done with rate increases despite a downshift to a 50-basis point move this week after four successive jumbo hikes
Investors banking on a bull run in China’s US$10 trillion onshore stocks in 2023 will need to be wary of complacency because of the ill-effects of likely recession in the US and other major economies, according to Shenwan Hongyuan Group.

Economic contraction will stifle overseas demand for Chinese goods and undermine one pillar of growth in the world’s second-largest economy, the Shanghai-based brokerage said. While the market will benefit from Beijing’s zero-Covid pivot, returns may disappoint forecasts.

“A recession in the US may arrive in the second quarter, and a recovery will not come sooner than the fourth quarter,” analysts including Fu Jingtao and Wang Sheng wrote in a report on Wednesday. “Declines in external demand will be persistent. Fundamentally, the A-share market will be under pressure.”


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The caution follows a chorus of bullish calls on Chinese stocks from local peers like Citic Securities and Wall Street investment banks including Morgan Stanley and Bank of America. China stepped up efforts to revive the economy by rolling back some of its toughest zero-Covid regimen, as well as unleashing financing lifelines to rescue the nation’s cash-strapped developers.

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Local stocks may go sideways in the first six months next year, before a recovery in the second half takes hold as economic activity rebounds, Shenwan Hongyuan said. Even so, the magnitude of gains would likely fall short of a bull market, the analysts said.

The CSI 300 Index, which tracks the nation’s biggest companies, has fallen 20 per cent so far this year, set for a second annual drop. The MSCI China Index, which tracks more than 700 companies listed at home and abroad, has declined 23 per cent this year on top of a 22 per cent loss in 2021.

Citic Securities, China’s biggest listed brokerage, expects the upside momentum in onshore stocks will strengthen into the second quarter. Morgan Stanley turned overweight on stocks in MSCI China Index earlier this month, after staying neutral for almost two years.

Morgan Stanley upgrades Chinese stocks as Beijing tweaks zero-Covid regime

Asian markets retreated on Thursday after Federal Reserve Chair Jerome Powell said the US central bank was not done with fighting inflation. Investors are worried that policy over-tightening will drive the US economy into a recession.

Profits for mainland-traded companies excluding banks and petrochemicals is likely to increase 1.3 per cent in 2023, Shenwan Hongyuan said. UBS Group, meanwhile, forecasts CSI 300 members will report a 15 per cent rise in earnings versus 4 per cent in 2022.