Chinese stocks have given up much of their recent gains as investors debate whether the bottom has truly been reached. The latest data only seems to confirm that China’s problems cannot be solved in a few days, while questions swirl around how much – or how willing – policymakers should act. One topic that has not changed in such an uncertain environment is the play on specific stocks. Strategists at Evercore ISI said many U.S.-listed Chinese stocks are “oversold” and expect them to be “trading undervalued at attractive valuations.” [earnings per share] on track to outperform,” analysts said in a Jan. 28 report. They selected companies with a capitalization of more than $1 billion and expectations of profit growth in the next two years. Another criterion was whether the stock was trading at more than 50%. Part of Evercore’s thesis is that Beijing will take further policy action after its annual parliamentary meeting in early March. announced it would cut its reserve requirement ratio by 50 basis points starting Monday. Lunar New Year, the biggest holiday of the year in China, essentially starts next Friday and lasts for a whole week. The signals come as Chinese stocks Evercore noted that at press time, more than 85% of Hong Kong’s Hang Seng index stocks were trading below their 200-day moving average, “an extreme that has coincided with lows and strong reversals in the past.” The Shanghai Stock Exchange A share index has also fallen below the so-called national fate line since around 2005, Evercore said. Chinese stocks – whether traded on the mainland, Hong Kong or the US – have been falling for more than two years. This means that funds that have done well have seen their value change in recent years. “It’s difficult to predict whether there will necessarily be a transition from value to growth,” Rachel Wang, director of China manager research at Morningstar, said in Chinese translated by CNBC. She noted that over the past few months, investors have moved from high-risk to low-risk products, from equities to fixed income. Is the worst yet to come? The Shanghai Composite Index closed nearly 1.5% lower on Friday, below its close at the start of its recent rally on Jan. 23. This interim growth followed news of PBOC rate cuts and media reports that signaled renewed government efforts to support markets and economic growth. The Hang Seng Index closed 0.2% lower on Friday, still above its Jan 23 close. Some remain skeptical that markets have survived the worst. “The most important thing for foreign investors to understand is that, unlike in the United States, stock market performance has very little impact on Beijing’s macro thinking,” the Clocktower Group said in a Feb. 1 report. “Unless the market collapse spills over into the real economy and threatens social stability, we doubt that the risk asset sell-off alone will lead to a fundamental policy shift,” the report said. Klocktower expects any turning point could come as housing prices plummet, wiping out the savings of many households. However, the long-term data trend shows that China is entering a new phase of growth after decades of double-digit growth. Understanding the need to pay more attention to companies’ competitiveness and individual profitability can help investors in this environment, said Ye Yuhua, manager of Guangzhou-based Liangdian Private Capital. “In the past, Chinese companies grew quickly, with many companies’ performance growing exponentially,” he said in Chinese translated by CNBC. “In this situation, investors may have placed too much emphasis on growth in the past.” The largest U.S.-listed Chinese companies by market capitalization on the Evercore ISI screen—Internet tech giants Alibaba, Baidu and JD.com—are expected to post single-digit earnings growth this year, followed by roughly 10% growth next year. By contrast, lesser-known names on the screen – fintech company Lufax, electric vehicle company Li Auto and recruitment site operator Kanzhun – are forecast to have double-digit revenue growth this year and next, Evercore’s report showed. Alibaba is set to report December earnings on Wednesday. February 7, while other companies have not yet set a release date. — CNBC’s Michael Bloom contributed to this report.
