What next after China’s rollercoaster sell-off?
Investors should adopt a relatively cautious stance on Chinese stocks following the recent crash and following bounce in the country’s share market, according to Schroders.
The MSCI China index was currently down 16.7% over the year so far, compared with a slump of just 8.4% from the MSCI AC World index. At one point, Chinese stocks were down close to 30% before rallying strongly.
Analysts at Schroders highlighted several reasons for the sell-off, with the initial catalyst being an announcement from the US Securities and Exchange Commission (SEC) that five US-listed Chinese companies face delisting if they do not provide access to accounting data to the audit regulator.
The SEC also noted that other companies could be added to the list as they report their report financial results. Up to 270 US-listed Chinese companies could ultimately be affected by this.
Other factors that contributed to the sharp sell-off in Chinese stocks include renewed lockdowns in some Chinese cities, following a sharp rise in COVID-19 cases, heightened geopolitical concerns stemming from Russia’s invasion of Ukraine and concerns that the global economy is heading into a stagflationary environment.
While the market has recovered somewhat in recent days, Schroders expected the Chinese economy will be “subdued” in the months ahead. This was leading Parbrook, Asian equity fund manager at Schroders, to take a cautious stance towards China.
In addition to the factors above, Parbrook highlighted the increasing amount of regulation that China is applying to its internet businesses as another negative. Indeed, the Hang Seng Tech index was hit by a heavier fall than the broader market last week, then rallied harder.
“In China, we have long had a stockmarket where the investment focus of many of the constituent companies is aligned more with state priorities than a goal of maximising long-term shareholder returns.
“This has clearly applied to most state-owned banks, utilities, telecom, and energy stocks for some time. However, it is also now increasingly applicable to some of the large internet companies and this is happening at a faster pace than anyone expected,” the manager said.
“These developments are not good news for stockmarkets and foreign investors. We believe the move to state/policy-directed investment will make shares in the companies affected less attractive.
“Then there are other factors influencing the overall market, such as the recent rise in COVID cases and the continuation of strict lockdowns as a response. Another uncertainty is China’s relationship with Russia as the war in Ukraine unfolds.
“All of this leads us to be relatively cautious on Chinese equities despite the falls. We do not view China as uninvestable but clients need to be aware parts of the market are less attractive structurally and risks are elevated at the moment.”
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