Chinese Stock Rally's Continuation Dependent on Strong Earnings

By Henry Ren, Bloomberg Markets Live Reporter and Strategist

Chinese Company Earnings Improving, but Insufficient to Sustain Stock Rally

Earnings of Chinese corporations are showing signs of improvement, but strategists believe they may not be sufficient to maintain the recent surge in the stock market. They argue that the rally, which was initially triggered by low valuations, requires a full-fledged earnings recovery for its continuation. The Chinese stock market's experience during the country's Covid reopening phase serves as a reminder. This phase, which started on a positive note in late 2022, only lasted for three months.

MSCI China Index's Rally and Subsequent Decline

During the reopening phase, the MSCI China Index saw a rally of 59% from its lowest to its highest point, with analysts raising forward earnings expectations by approximately 10%. However, starting February 2023, earnings revisions turned negative, and Chinese stocks were unable to regain their momentum.

Chinese Stocks at a Critical Juncture in 2024

This year, following a 25% rebound from January's low, Chinese stocks are once again at a critical juncture, with investors looking to earnings as potential catalysts. The first-quarter reports have so far been a mixed bag.

Mainland Firms Record Earnings Decline

Companies listed on the mainland have reported a 4% decline in earnings as their gross profit margins remain low, according to UBS strategists. The MSCI China components present a similar picture.

Drop in Sales for Benchmark Index Constituent Companies

Companies that constitute a third of the benchmark index have reported a 5% drop in sales, as warned by JPMorgan in a note dated May 1.

Big-Cap Internet Companies' Reports Crucial for Earnings Season

The upcoming reports from big-cap internet companies will likely determine the impact of this earnings season on the index level. Weak retail sales growth in March and a decrease in per-capita tourist spending during the May 1-5 national holiday do not bode well for the sector, which is heavily influenced by consumer sentiment.

Importance of Better Earnings

Improved earnings are crucial, particularly at a time when the factors that propelled Chinese stock indices into bull territory are waning. The MSCI China Index is now technically overbought for the first time since January 2023.

Stabilization of Japanese Equities and US Markets

In the meantime, Japanese equities have stabilized, and US markets have come to terms with the prospect of fewer Federal Reserve rate cuts, reducing the urgency for global funds to diversify away from developed markets.

Positive Signs Despite Challenges

However, not everything is negative. The number of mainland-listed companies that missed estimates has decreased this reporting season, and large-cap stocks are experiencing more upward earnings revisions, according to Morgan Stanley strategists led by Laura Wang.

Signs of Improvement in Select Industries

Despite mixed and weak macro data, some specific industries are showing signs of improvement, according to Vivian Lin Thurston, a fund manager at William Blair Investment Management in Chicago. She noted that export-driven companies and appliance makers have stood out.

Need for Patience for Broad Recovery

However, a broader recovery requires more patience. "We do have some better news on some specific sectors because the expectations are very low," said Societe Generale strategist Frank Benzimra. "But it's just too early to say that this is a sustainable upturn."

Article by Tyler Durden

This article was published on Thursday, May 9, 2024, at 22:20.

Conclusion

The future of the Chinese stock rally seems uncertain and heavily dependent on the robustness of earnings. What are your thoughts on this? Do you think the rally can sustain without strong earnings? Share this article with your friends and discuss. Remember, you can sign up for the Daily Briefing, which is every day at 6pm.