The recent quarterly reports from major Chinese companies reveal that the local stock market requires a discerning eye for stock pickers. According to Lorraine Tan, director of Asia equity research at Morningstar, there has been a unique outperformance in certain companies. The overall trend shows weakness influenced by macroeconomic factors, with cautious guidance being issued. The companies that have managed to outperform have attributes such as a resilient mix of products or strong market positions.
Both Alibaba and Tencent reported significant increases in capital expenditures in the quarter ended June, with the former reaching $1.66 billion and the latter 8.73 billion yuan ($1.22 billion). This growth in spending could indicate a potential turnaround in domestic demand, as highlighted by analysts at Morgan Stanley. The U.S.-listed stock, GDS Holdings, has been identified by the strategists as having a “significant first mover advantage” in overseas expansion, particularly with its land agreement in Malaysia.
Chinese companies like PDD Holdings are gearing towards overseas growth, with PDD holding the second-largest weighting in CoreValues Alpha Greater China Growth ETF (CGRO). This ETF, established in October 2023, aims to trade China’s public markets better than other ETFs, leveraging timely information from offices in both the U.S. and China to adjust the portfolio frequently. The criteria for companies in the CGRO ETF include considerations of not compromising American tech, economic interests, or values, as well as avoiding U.S. sanctions lists.
Despite the steady performance of CGRO, which holds just over 30 Chinese companies, the ETF was down 4.3% year to date as of Friday’s close. This drop was higher compared to the 2.3% loss experienced by the KraneShares CSI China Internet ETF (KWEB) during the same period. According to Ben Harburg, founder of CoreValues Alpha, outperformance in the Chinese market is crucial to attract more investments, as investors are becoming more selective.
Chinese stocks in Hong Kong and mainland China have been struggling to recover significantly since the pandemic outbreak. The uncertainty surrounding growth prospects and policy decisions has hindered the market’s rebound. Harburg predicts that potential catalysts for Chinese stocks could come from a U.S. stock market downturn, as he believes the U.S. market is currently overvalued. He also suggests that ancillary capital that should have gone into China has been absorbed by markets in Japan and India, which have seen gains of 14% and 12%, respectively, for the year.
The Chinese stock market poses challenges and opportunities for investors, with a focus on selective stock picking, resilience in companies, and overseas growth strategies. It is essential for investors to stay informed about market trends and global economic developments to make informed investment decisions in the ever-evolving landscape of the Chinese stock market.
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