Lose your bias against Chinese stocks as the tide could turn with policy support in store, JPMorgan Private Bank says
- Reasonable valuation, steady earnings growth and policy support will reward investors taking risk on Chinese equities after the recent sell-off, the private bank says
- Bank says more than two-thirds of its US clients have no exposure to China, and around half of them are materially underweight on Europe
Cheap valuation, stronger earnings growth and policy support will provide more upside for Chinese equities, which have suffered US$382 billion of sell-off since late January as global investors lost conviction on China’s post-pandemic economic outlook. The economic boost from reopening has been mixed, but recovery is “durable” going into the year end.
“Policymakers have moved in the direction of more market-friendly practices,” strategists including Tom Kennedy wrote in a mid-year outlook report to clients. “New credit growth, an important sign of government support for the economy, is at its highest level since before the pandemic.”
Stocks in the MSCI China Index trade at 10.5 times their forward 12-month earnings, compared with an average of 14.1 times over the past five years. Members in the MSCI World Index fetch about 16.9 times currently, according to Bloomberg data.
03:45
China, US offer competing security visions for Asia-Pacific at security forum
The broadest index tracking Chinese stocks at home and abroad has slumped 19 per cent since peaking this year on January 27, while the yuan weakened to near a six-month low. Global equities rose 3.3 per cent over the same period, while benchmarks in the US and Japan advanced by 5 per cent and 18.6 per cent, respectively.
Chinese state media talk up onshore stocks to counter foreign-fund exodus
The US stock market has outperformed Europe by as much as 125 per cent, and China by 175 per cent, over the past 10 years, JPMorgan Private Bank said. More than two-thirds of its US clients have no exposure to China at all, and around half of them are materially underweight Europe versus benchmarks developed markets, the firm added.
“The global equity investor’s bias against Chinese assets has been especially strong,” the strategists wrote. “But holding that underweight could now act as a drag. Europe has outperformed the US over the last 12 months. Although China has lagged, we see reason to believe the tide could be turning.”
The private bank is staying the course on Chinese equities, after upgrading property stocks in January, on optimism that the economic reopening would drive a market revaluation. There won’t be a US-China decoupling, and the banking group will keep doing business in China in “good and bad times,” JPMorgan Chase CEO Jamie Dimon said in a Bloomberg interview recently.
JPMorgan Private Bank also said its clients have locked up US$150 billion in cash over the past 12 months amid the Federal Reserve’s most-aggressive hiking cycle in 40 years. The cycle “is complete” and that cash may need to be deployed as the Federal Reserve may reduce rates over the next 12 months, it added.
“Of course investing in China comes with greater risk than investing in many developed markets,” the private bank said in its outlook report. “But we think certain investors could reap a higher reward for taking that risk in the second half of the year.”
