- Analysts have stopped revising down estimates for Chinese equities, suggesting that they may have hit a bottom.
- Lack of transparency, geopolitics and existing structural issues all suggest that investors proceed with extreme caution when wading back into Chinese assets.
For most investors busy with their day jobs or other pursuits, analyst reports can be useful even if on a broad macro level, to determine where the next pocket of opportunities lie.
But China, which was once seen as a limitless font of economic potential, has suffered both a confidence and an economic crisis, entirely of Beijing’s own making.
The seemingly relentless crackdown on once lucrative sectors, from real estate to technology, and the brutal zero-Covid lockdowns had even led analysts at banking giant JPMorgan Chase to declare (now retracted) that China was “uninvestable.”
Now analysts are suggesting Chinese assets may have finally bottomed out, with many stopping downward estimate revisions.
Mind you, that’s not to say that analysts have suddenly turned bullish on China, they’ve simply become less bearish, citing policy stimulus and easing pandemic curbs as lifting sentiment.
So is China out of the woods just yet?
Goldman Sachs and China International Capital expect profits at Chinese firms in the benchmark MSCI China to rise by the second half of this year.
And tech giants including Alibaba Group Holding and Baidu all delivered better-than-feared results, helping lift their share prices.
But the rebound may also have to do with the fact that many analysts are also groping in the dark when it comes to China – by simultaneously undershooting and overshooting.
So deprived of bullish news have global investors become that many will cling on to even the slightest sliver of hope that things are turning around in the world’s second largest economy, especially when conditions everywhere else seem to be dire.
But therein lies the challenge with reading too much into analyst estimates.
Few analysts predicted the arbitrary and sudden crackdown on China’s real estate, tech and afterschool education sectors by Beijing.
Nor would many analysts have bet on Beijing suffering a second Covid-19 wave that would result in rolling lockdowns, especially since China appeared to be one of the first countries in the world to have gotten the early variant of the coronavirus under control.
Which is why investors could be investing prematurely by investing on the latest string of analyst reports that are simply declaring things are near the bottom.
Calling bottoms is a tricky business even where information is transparent, but China still has some serious structural issues to deal with before even the most optimistic investor ought to take a long-term bullish position.
For starters, the copious amounts of leverage coursing throughout China’s real estate sector is a matter that has yet to be unequivocally resolved and that’s not to mention the defaults where the dust has yet settled.
The status of Chinese firms currently listed on American exchanges remains uncertain and the global appetite for Chinese assets especially given the increasingly complex geopolitical situation remains unclear.
All of these factors have and will continue to weigh on whether or not investors should wade back into embattled Chinese assets because trying to find a bargain could also unwittingly result in catching falling knives.
