Almost as quickly as China’s stock rally has occurred, several investment analysts have been quick to point out its weaknesses. “China’s recent rally was not justified by fundamentals,” Citi emerging markets strategists said in a note on Friday, in which they downgraded China while upgrading India. The company has a greater focus on Chinese internet, industrials and technology, but is neutral on auto and consumer staples stocks overall. Among sectors, consumer discretionary stocks have the highest expected earnings per share growth this year, at about 29%, Citi said in a report. After a tepid start to 2024, the MSCI China Index is outperforming not only emerging markets but also the S&P 500, up nearly 11% year-to-date. “Although this looks like a big rally, it is not massive,” said Ding Wenjie, global equity investment strategist at China Asset Management Co., according to a CNBC translation of her remarks in Chinese. “The capital increase is not as big as we expected,” she said, noting that most of the buying was done by hedge funds rather than long-only funds – primarily Hong Kong-listed consumer discretionary companies in the sector Internet technologies. MSCI China’s largest holdings include Hong Kong-listed Tencent and Alibaba, which recently ramped up share buybacks with additional cash. “Our strategy has always placed a lot of emphasis on free cash flow,” Dean said, noting the defensive aspect and how recent government capital markets policies have emphasized companies’ ability to buy back shares. Investors in China are increasingly focusing on free cash flow, a measure of profitability that reflects how much money a company makes without taking into account operating expenses. The cash can be used to pay off debts to creditors or pay dividends to investors. Such signs of financial health are important for an economy whose growth is slowing after years of rapid expansion, China Merchants Securities noted in a webinar on financial platform Wind Information last week. With demand subdued, relying on high levels of capital spending can no longer generate significant returns, the company said in a securities filing. The company is now focused on finding industry leaders with high free cash flow. Future Earnings Investors will soon receive detailed information about the financial position of the most famous companies. Tencent and Alibaba will report quarterly earnings on Tuesday, while Baidu will report on Thursday. Hong Kong-based AlphaHill Capital is specifically looking for Chinese consumer companies with free cash flow growth, said Xiliang Jiang, the firm’s partner and portfolio manager. He noted that the situation around China may have become significantly darker in the past five years, but he does not expect China to repeat Japan’s “lost decades” due to its much larger market, which can cover research and development costs. Jiang expects the Chinese consumer to start changing in the second half of this year or next. There are already some green shoots. The China Consumer Confidence Index (CCI) has risen over the past 9 months, despite falling property prices and fears of a “household balance sheet recession.” 120,” Bank of America analysts said in a report in late April. “We advise investors to focus on firms that can create value for consumers – value for money, functional value and/or emotional value,” the report said. Two of them based on positive free cash flow are Li Auto and New Oriental Education. Based on their expectations for future cash flows, analysts also like Beijing-Shanghai high-speed rail operator, a state-owned company listed in Shanghai. They noted the potential for price increases while benefiting from increased travel post-Covid. Last week, Chinese media reported that many Chinese high-speed train operators would raise ticket prices by nearly 20% on certain routes, including travel within Shanghai. State-owned transportation and utility companies can boost their profits by raising prices in China’s current economic environment because they have monopoly power, said Liqian Ren, head of quantitative investment at WisdomTree. The firm has an ETF that tracks non-state-owned Chinese companies. “How long will this tactical rebound last? [last] probably depends on economic data in the next couple of weeks,” she said. “Given that China is not stimulating too much, this means that the Chinese economy is not as bad as [much] “Negative sentiments,” Ren added. China is due to release key economic data on Friday, May 17 local time. Analysts polled by Reuters expect retail sales to increase 3.8% in April compared with a year earlier. — CNBC’s Michael Bloom contributed. report.
