Several investment analysts have raised concerns about the recent rally in China’s stock market, stating that it was not justified by fundamentals. While the MSCI China Index has shown gains of nearly 11% year-to-date, experts warn that the rally is not broad-based and is primarily being driven by hedge funds rather than long-only funds. Consumer discretionary stocks have seen the highest expected earnings per share growth this year but the increase in capital is not as significant as expected, with much of the buying concentrated in Hong Kong-listed consumer discretionary names in the internet tech sector.
Investors in China are increasingly focusing on free cash flow as an indicator of profitability, especially in a slowing economy. China Merchants Securities highlighted the importance of finding industry leaders with high free cash flow in an environment of moderating demand. Tencent, Alibaba, and Baidu are set to release quarterly earnings soon, with Hong Kong-based AlphaHill Capital specifically looking for Chinese consumer names with growing free cash flow. The firm believes that the Chinese consumer market will start to turn around in the second half of this year or next year, despite concerns about falling property prices and a potential household balance sheet recession.
Bank of America analysts have advised investors to focus on firms that can create value for consumers and have positive free cash flow. They highlighted Li Auto, New Oriental Education, and the Beijing-Shanghai High-Speed Railway operator as potential picks based on their expectations of future cash flow. Chinese high-speed train operators have recently raised ticket prices for certain routes, taking advantage of their monopoly power in the current economic environment. Analysts are closely watching China’s upcoming economic data release on May 17 for insights into the country’s retail sales growth.
Overall, analysts have noted that the recent rally in China’s stock market may not be sustainable in the long term, with concerns about the underlying fundamentals of the economy. While there are signs of improvements in the Chinese consumer market, there are still challenges ahead, including falling property prices and fears of a household balance sheet recession. However, experts believe that China’s larger market size and potential for research and development investments may prevent it from experiencing a prolonged period of economic stagnation similar to Japan’s “lost decades.” Investors are advised to carefully monitor economic data and company earnings reports to make informed decisions in the volatile Chinese market.
