Chinese stocks are likely to rebound on an expected revival in company earnings from this quarter, according to the co-manager of a Vontobel Holding AG emerging-market equity fund.
(Bloomberg) — Chinese stocks are likely to rebound on an expected revival in company earnings from this quarter, according to the co-manager of a Vontobel Holding AG emerging-market equity fund.
“We believe earnings have troughed, so the recovery should be relatively broad based,” said Thomas Schaffner, who helps manage the $4 billion Vontobel Fund- mtx Sustainable Emerging Markets Leaders fund. China’s earnings growth may clock in at about 20% this year as the economy recovers, a pace which would outpace that of several countries, he added.
A widely anticipated revival in China’s reopening rally has faltered amid US-China tensions and an uncertain growth outlook. A surprise contraction in the manufacturing sector suggests that pockets of weakness remain in the economy even after the nation abandoned its strict virus curbs.
First-quarter results were weighed down by a weak January as China exited its Covid strategy, and the “second quarter economic data should actually start to look better” with earnings growth catalyzing the market, he added.
China Profits Underwhelm, Adding to Trader Angst: Earnings Watch
Benchmarks in Hong Kong and onshore China are struggling to hold onto 2023 gains, with foreign funds turning net sellers of the latter in April as the US weighs investment curbs. The MSCI China Index fell about 5% last month, registering its worst April since 2004 and making it a prominent laggard among the world’s major gauges.
Still, some green shoots have started to emerge from the ongoing reporting season in China. Many industry leaders including battery maker Contemporary Amperex Technology Co. and liquor giant Kweichow Moutai Co. reported stronger-than-expected results.
Schaffner expects earnings to rebound as net interest margin pressures have likely peaked for the financial sector. Chinese banks led a rally in the market on Monday as three national lenders lowered deposit rates.
Schaffner is also exploring investments in the domestic electric-vehicle supply chain including automakers, and said that recent price wars with Tesla and other car manufacturers are likely a short-term phenomenon.
The fund — which has returned 2.8% this year to beat about two-thirds of its peers — has been slowly reducing its overall onshore China weight since the start of 2023, according to factsheets. However, its weight at the end of March still stood at 43.8%, well above China’s 30% weight in the MSCI Emerging Markets Index at the time.
Here are some other takeaways from the interview:
- Expects Asian equities to outperform developed markets this year driven by China’s earnings growth, a trough in the semiconductor cycle and a weaker dollar
- For memory chipmakers, inventory levels have peaked, production is being cut after losses and “most likely demand will pick up in the second half”
(Updates with China bank rally in seventh paragraph)
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