When analyzing major Chinese companies’ latest quarterly reports, it becomes evident that the local market requires a careful approach from stock pickers. According to Lorraine Tan, director of Asia equity research at Morningstar, there has been an overall outperformance in certain companies. However, this outperformance is not a general trend across the board. Instead, most companies are reflecting weaknesses in their performance due to macro trends, and their guidance is leaning towards caution.
Tan also highlights that the individual companies that have managed to outperform their peers have done so because they possess a more resilient mix of products or hold strong market positions in their respective industries. This resilience is seen in companies like Alibaba and Tencent, which have reported significant increases in capital expenditures compared to the previous year.
As pointed out by Morgan Stanley China equity strategist Laura Wang, there may be a potential turnaround in domestic demand for Chinese data center company GDS Holdings. Wang and her team have identified GDS as having a significant first-mover advantage in overseas expansion, particularly with its land agreement in Malaysia. This observation has led them to add the U.S.-listed stock to their focus list for China and Hong Kong.
Another Chinese company showing promise in terms of overseas growth is PDD Holdings, the parent company of Temu. This company is scheduled to report earnings before the U.S. market opens on Monday and has been gaining exposure to international markets. PDD holds the second-largest weighting in CoreValues Alpha Greater China Growth ETF, indicating its potential for growth and development.
CoreValues Alpha’s Ben Harburg emphasizes the importance of active trading in Chinese stocks, as he believes that trading based on a passive strategy is too complicated given the market’s complexities. The CGRO ETF, launched in October 2023, holds over 30 Chinese companies that meet specific criteria to ensure alignment with American tech and economic interests. While the ETF has seen a slight decline year to date, Harburg remains confident in the fund’s ability to outperform other ETFs in the market.
Chinese stocks in Hong Kong and mainland China have faced challenges in recovering significantly since the pandemic struck, causing uncertainty about growth and policy. Harburg predicts that the more likely catalyst for a rebound in Chinese stocks will come from a drop in the U.S. stock market, rather than stimulus measures from Beijing. He also points out that capital that could have gone into China has been absorbed by Japanese and Indian markets, which have seen gains of 14% and 12% respectively for the year.
Investing in Chinese markets requires a nuanced approach and careful consideration of individual companies’ performance and market positioning. While there are challenges and uncertainties in the market, there are also opportunities for growth and development for companies with resilient business strategies and strong overseas expansion plans. Keeping a close eye on market trends and potential catalysts can help investors navigate the complex landscape of Chinese stocks successfully.