(Corrects the timing in the 8th paragraph to 'last week')
Consensus building about China's recovery prospects
Less agreement about investment decisions; but bulls
Citi, Goldman, BofA analysts are positive
HONG KONG, Dec 5 (Reuters) - As Chinese assets whipsaw
around hopes and fears over the country's path out of the
pandemic, big offshore investors are slowly leaving the
sidelines as they plot a cautious return to one of the year's
worst-performing equity markets.
The drumbeat of bullish outlooks has grown a bit louder over
recent weeks as analysts at Citi, Bank of America, and J.P.
Morgan upgraded recommendations, and said re-opening can lift
consumer-exposed stocks that have fallen to attractive prices.
Goldman Sachs forecasts 16% index returns for MSCI China
and CSI300 next year and recommends
an overweight allocation to China, while J.P.Morgan expects a
10% potential upside in MSCI China in 2023.
Bank of America Securities turned bullish in November, with
its China equity strategist, Winnie Wu picking internet and
financial stocks to lead the short-term rebound.
Overall, however, while consensus is building around
economic recovery, there is hesitation over timing and weight of
capital to allocate to China as the regulatory and political
risks that have stalked its equity markets for the past couple
of years remain.
"We would rather miss the first 10% gains, and wait until
when we can see clearer, ongoing signs of policy pivot," said
Eva Lee, head of Greater China equities at UBS Global Wealth
Management, the world's biggest wealth manager by assets.
"We have experienced several rounds of policy back and forth
in 2022," she added, referring to both COVID and property
policies. UBS Global Wealth Management recommends a
market-neutral allocation to Chinese stocks.
There is some evidence that the first leg of an early
recovery happened last week, with the Hang Seng up 6% and
closing out its best month since 1998 with a 27% rise through
November. The yuan posted its best week since 2005 on Friday.
Market participants say the asset moves so far- coming with
COVID cases at record highs and only hints of a shift in
authorities' response - suggest light positioning in China that
could lift markets if it were to solidify into steady inflows.
U.S. institutional investors continue to reduce U.S.-listed
Chinese American Depositary Receipts (ADRs) so far in the fourth
quarter with estimated outflows of $2.9 billion.
Short interest in ADRs was also up by 11% last month, Morgan
Stanley data as of Nov. 29 shows. Societe Generale analysts
downgraded their recommended China allocation from overweight to
ACCUMULATE ON WEAKNESS
China's market weathered a perfect storm this year, with
U.S.-China tension threatening the U.S. listings of Chinese
companies, a credit crisis crunching the once-mighty real estate
sector and COVID restrictions curtailing growth.
The CSI300 has lost 22% and the Hang Seng 20% so far this
year, compared with a 16% loss for world stocks.
The policy response has been monetary easing, steadily
increasing support for the property sector and the easing of
some of the strict COVID rules. It is yet to win investors' full
approval, since unpredictable regulation and politics still hang
over profitability, and domestic confidence remains fragile.
"Monetary easing has become ineffective, just like pushing a
string," said Chi Lo, senior strategist at BNP Paribas Asset
Management. He is sticking with a preference for sectors that
are likely to receive policy tailwinds.
"We continue to focus on the three key themes which are in
line with Chinas long-term growth target: technology and
innovation, consumption upgrading and industry consolidation,"
Goldman Sachs also recommends policy-aligned bets on sectors
such as technology hardware and profitable state-owned
Politics aside, price and the prospect that rate hikes put a
lid on U.S. equities next year has also got money managers
starting to weigh up the risk of missing out.
A 27% drop for the MSCI China index this year has left its
price-to-earnings ratio at 9.55 against a 10-year average of
"It's now getting risky to be really underweight or short
China as many of the hedge funds were," said Sean Taylor,
Asia-Pacific chief investment officer at asset manager DWS,
which thinks there is scope for a 15-20% rally in China next
"Our view is to accumulate, on weakness, reopening
beneficiaries, and particularly those driven by the consumer,"
(Reporting by Summer Zhen; Editing by Shri Navaratnam)