After days of troubling movements in Chinese equity markets, some semblance of normality seems to be returning at last to the Hang Seng and CSI300 indices. A combination of strong earnings performance from e-commerce giant Alibaba, renewed confidence in coal mining shares (with Yankuang Energies seeing a 9% rally), and outstanding performance (+13%) by locally-focused e-commerce giant Meituan, all contributed to highly positive sentiment in a market still suffering from covid-related turbulence.
News that most of Shanghai’s 26 million residents were entering a new lockdown, with free testing in the Pudong financial district, couldn’t have come at a worse time. Raw materials shortages caused by the Ukraine crisis and American sanctions against Russia, ongoing concerns about rising inflation, and now a renewed focus on covid prevention in a country famous for its firm approach and zero-covid strategy, have combined to create a very unhealthy cocktail for local equity markets.
As Q1 results continue to come in, we are seeing stronger than expected performance for many Chinese businesses, with Meituan reporting a smaller than expected loss, and many other Chinese conglomerates outperforming expectations. For Chinese and Asian retail investors, often heavily exposed to these stocks in their retirement portfolios’, this will be encouraging news. On the other hand, weaknesses caused by the high-inflation and sanctions-impacted environment of the last month may take time to appear on corporate balance sheets; with markets initially moving sharply downwards on news of the new lockdown, sentiment appears to be finely balanced at best.
Investors will be cheered, then, by the return to equity strength seen in both Hong Kong and mainland markets – their most pressing question, of course, will be whether it can last. Despite impressive long-term returns, the recent volatility might add to the trend of Asian retail investors prioritising American shares. A recent study revealed that the most traded shares in APAC for the last month remain major American companies: Tesla, Apple and Block. After a torrid January, many big American names in tech seem to be staging a comeback, as they report strong earnings data, with large sums of cash to hand. Asian retail investors with major exposure to these stocks could see related leaps in performance.
Not everyone wants a portfolio stuffed with high-growth, high-risk tech companies, however. For those specifically interested in industrial stocks, particularly in the metals sector, some analysts are now advising a focus on mining over processing and refining businesses. With soaring prices for raw commodities, specialised processors are facing sharp cost hikes which cannot always be passed onto the end user, due to fierce competition for market share and the existence of metal stockpiles or futures contracts locked in at a lower price.
In the energy sector, spooked by US sanctions against Russia, the Chinese government has announced its intention to massively increase domestic energy supply, a trend that could open opportunities for retail investors with exposure to related companies.
It looks like an interesting time for investors in the Chinese equity markets generally, and especially those exposed to industrial companies. Many will be hoping that recent strong performance, as reflected in the Q1 2022 results to date, will not be thrown off course by a return to lockdowns or further global market turmoil.