Investment analysts have commented on the recent rally in Chinese stocks, highlighting that it was not justified by fundamentals. Despite this, the MSCI China Index has seen gains of nearly 11% year-to-date, outperforming both emerging markets and the S&P 500. The increase in capital was not as significant as expected, with hedge funds primarily driving the buying activity in consumer discretionary names in the internet tech sector. Companies like Tencent and Alibaba have been ramping up stock buybacks with their extra cash, which is seen as a defensive measure in the current economic environment.
China Merchants Securities pointed out the importance of free cash flow as an indicator of company profitability, particularly in an economy experiencing slowing growth. The focus is now on finding industry leaders with high free cash flow, as high levels of capital expenditure are no longer generating significant returns in a moderating demand environment. Investors are awaiting quarterly earnings reports from companies like Tencent, Alibaba, and Baidu to gauge their financial performance. Hong Kong-based AlphaHill Capital is specifically looking for Chinese consumer names with free cash flow growth, as they expect the Chinese consumer market to start turning around in the second half of this year or next year.
Bank of America analysts have advised investors to focus on companies that can create value for consumers, particularly those with positive free cash flow. They recommended firms like Li Auto, New Oriental Education, and the Beijing-Shanghai High-Speed Railway operator for their potential to generate value for investors. Chinese high-speed train operators have recently raised ticket prices by nearly 20% on certain routes, benefiting from increased travel post-Covid. State-owned transportation and utilities companies in China have the power to increase profit margins by raising prices due to their monopoly status.
WisdomTree’s leader of quantitative investment, Liqian Ren, noted that the duration of the recent rally in Chinese stocks may depend on upcoming economic data releases. China’s economic data, including a 3.8% increase in retail sales expected in April, will provide more insight into the state of the economy. Despite concerns about the recent rally’s sustainability, Ren suggested that the Chinese economy may not be as weak as some negative sentiment suggests, as the government has not implemented significant stimulus measures. Investors are advised to monitor economic data releases to gauge the strength of the Chinese economy moving forward.
