(Bloomberg) -- Chinese stock investors are losing patience as a long-awaited earnings recovery fails to materialize and a rally unravels.
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Earnings estimates on key Chinese gauges have been cut the most in Asia this year as a deepening housing crisis and weak retail sales hurt sentiment. Stocks have lost momentum after peaking in mid-May, with the MSCI China index falling more than 8%.
"We've now seen 11 consecutive quarters of earnings losses for MSCI China and the analyst consensus hasn't really grasped how weak the underlying growth environment is in China," said Jonathan Garner, chief Asia equity strategist at Morgan Stanley. he said Thursday. โYou have to be selective to get involved in China. โThere is also more competition, particularly in sectors such as e-commerce.โ
Optimism that corporate performance will improve has been central to a months-long bull run earlier this year, with global funds tiptoeing back into the world's second-largest stock market. The recent decline is bringing back grim memories of recent years, when rebounds were soon overshadowed by sell-offs as risks from geopolitical tensions to regulatory crackdowns resurfaced.
According to the data, the Shanghai Composite Index and the CSI 300 Index have each seen their consensus earnings estimates fall by more than 6% this year, compared with a 1.6% rise for the Asia gauge of MSCI and even bigger increases for benchmark indices in India and Japan. compiled by Bloomberg.
Earnings results for MSCI China index members missed the aggregate estimate by about 3.5% in the first three months of the year, while those for domestic stocks showed a similar trend, another set of data showed.
As the recovery falters, foreigners are selling again. Foreign investors sold domestic stocks for nine consecutive days through Thursday, shedding the equivalent of more than $5 billion in the longest stretch of retreat since August 2023.
Investors are returning to โa wait-and-see approach as allocations fall back into underweight territory,โ according to the latest survey of Asian fund managers by Bank of America Corp. โThe frustration of having been hit a โToo much has become a structural bearish attitude towards this asset class,โ strategists such as Ritesh Samadhiya wrote in a June 18 report.
The survey showed money managers are net underweight by 6% in Chinese stocks, down from a neutral position in May.
While Chinese investors are used to the vagaries of the market, some have been betting that this time would be different, as Beijing unleashed a series of market-supportive policies, including a real estate rescue package. That support, along with earnings recovery hopes, helped draw rare buy calls from strategists at UBS Group AG and Societe Generale SA, and prompted a U-turn by once-bearish money managers, including veteran Mark Mobius.
As the slide drags on, with the CSI 300 down for a fifth week, doubts arise again. Adding to the concerns is the weakness of the data. China's home prices fell at a faster pace in May, and the country's largest internet companies are turning to massive discounts to attract customers during the "618" shopping festival.
In its portfolio update in late May, T. Rowe Price moved to overweight emerging market stocks excluding China, but kept the nation underweight, saying stimulus so far is too incremental to reflate the market.
Optimists are pinning their hopes on July's third plenary session, one of the country's most important political events, where top leaders outline long-term economic goals and telegraph policy changes. The MSCI China index โwill trade better heading into July and August,โ Wendy Liu, equity strategist at JPMorgan Chase & Co., wrote this week. Among the reasons she cited the third plenum and continued buybacks.
The risk is that if the outcome of the third plenary session disappoints, the dominant view on Chinese stocks may become decidedly pessimistic amid a lack of catalysts.
What analysts expect in terms of earnings over the next two years "can only be a miracle," CLSA chief equity strategist Alexander Redman said at a news conference in Jakarta earlier this month. Investors should keep their weight on Chinese stocks as their consensus earnings estimates look too optimistic, he added.
โWith the help of Ivy Chok, John Cheng and April Ma.
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