As the summer holidays come to an end, investors in China are accepting that consumption and growth in the country will remain sluggish. JPMorgan recently downgraded its opinion on Chinese stocks to neutral due to a challenging outlook. Despite this downgrade, JPMorgan still holds 18 China stocks in its global emerging markets model portfolio. The analysts at JPMorgan believe in select Internet names for growth and rising shareholder returns, as well as AI thematic plays once the current consolidation completes. The Consumption and Real Estate sectors in China are still facing domestic concerns with few bottom-up stock picking opportunities.
Chinese policymakers have acknowledged the softness in domestic demand but have not taken significant action to boost consumer sentiment. Uncertainties surrounding the China economic outlook range from tensions with the U.S. to lingering deflation pressure. Consumer prices in China have barely risen in the last year, impacted by the real estate slump and worries about future income. JPMorgan’s downgrade comes following Nomura’s demotion of MSCI China to neutral from overweight, citing consistent disappointments in the lack of meaningful measures to support the economy and property sector, leading to a tepid economy.
With U.S.-China relations stabilizing in the past year, analysts point to uncertainty surrounding the U.S. presidential election in November as a reason for Beijing holding off on domestic stimulus. U.S. national security advisor Jake Sullivan visited Beijing, emphasizing the importance of high-level communication in managing the bilateral relationship. During previous periods of escalating U.S.-China trade tensions, the MSCI China index fell each time, with the utilities sector outperforming. JPMorgan’s updated global emerging markets model portfolio includes internet-related names Alibaba, Tencent, Kuaishou Technology, and Meituan, all rated overweight by the bank.
Among JPMorgan’s emerging markets growth and value picks, only one Chinese stock features on both lists – Kuaishou, a Hong Kong-listed short video company that reported revenue and earnings for the second quarter beating analysts’ expectations. With an increase in average daily active users, Kuaishou has shown promise for future growth. JPMorgan has a price target of 65 Hong Kong dollars on Kuaishou, suggesting a significant upside from the current close. The investment bank selects its value and growth stock picks based on cash flow, upside potential, and historical and expected sales increases.
In conclusion, as investors in China prepare for the challenges of sluggish consumption and growth, JPMorgan’s recent downgrade of Chinese stocks underscores the uncertain economic outlook. With consumer prices barely rising and concerns about domestic demand persisting, investors are looking to select Internet names and AI thematic plays for growth opportunities. While U.S.-China relations have stabilized, uncertainty surrounding the U.S. presidential election is impacting Beijing’s decision-making on domestic stimulus. Amidst these challenges, Kuaishou stands out as a promising growth stock, with a positive outlook for the future.
