As the summer holidays come to an end, investors in China are preparing for continued sluggish consumption and growth in the country. JPMorgan recently downgraded its opinion on Chinese stocks to neutral from overweight due to the challenging outlook. This decision was made in light of uncertainties about the China economic outlook, including tensions with the U.S. and lingering deflation pressure. Despite the downgrade, JPMorgan still holds 18 China stocks in its global emerging markets model portfolio, with a focus on select Internet names and AI thematic plays.
Chinese policymakers have acknowledged softness in domestic demand, but have yet to take meaningful action to boost consumer sentiment. The real estate sector, in particular, remains marred by concerns with few bottom-up stock-picking opportunities. Nomura also recently demoted MSCI China to neutral from overweight, citing consistent disappointments in the lack of supportive measures for the economy and property sector. Analysts are concerned that the U.S. elections could prove to be an overhang for the market, leading to uncertainties in U.S.-China relations.
The U.S.-China relationship has stabilized over the past year, but analysts point to uncertainty around the U.S. presidential election in November as a reason why Beijing has held off on domestic stimulus. During periods of escalating U.S.-China trade tensions in recent years, the MSCI China index experienced declines, while China’s utilities sector outperformed. In response to the challenging outlook, JPMorgan updated its global emerging markets model portfolio by adding shares of state-owned utility operator CR Gas and removing shares of other Chinese companies.
Despite the overall downbeat outlook, one Chinese stock that stands out for JPMorgan is Hong Kong-listed short video company Kuaishou. The video app, a competitor to TikTok owner ByteDance, reported strong revenue and earnings for the second quarter, beating analysts’ expectations. JPMorgan has a price target of 65 Hong Kong dollars on Kuaishou, implying significant upside potential. The stock is down more than 20% for the year so far, making it an attractive opportunity for investors looking for growth in the Chinese market.
In conclusion, the challenging economic outlook, uncertainties surrounding U.S.-China relations, and lack of significant stimulus measures have led to downgrades in Chinese stocks by major investment firms like JPMorgan and Nomura. Despite these challenges, there are still opportunities for investors in select Internet and AI thematic plays, as well as in undervalued companies such as Kuaishou. As the Chinese economy navigates through these difficult times, investors will need to carefully assess the risks and opportunities in the market to make informed decisions about their investments.
