The latest quarterly reports from major Chinese companies have shed some light on the complexities of investing in the local market. According to Lorraine Tan, director of Asia equity research at Morningstar, there has indeed been outperformance in certain companies. However, this outperformance seems to be isolated to specific players in the market, rather than a broad trend. The overall sentiment seems to reflect weakness in alignment with macro trends, with cautious guidance being provided by many companies.
Tan also noted that the companies that have managed to outperform their peers have done so due to their resilient mix of products or strong market positions. This was evident in the quarterly reports of companies like Alibaba and Tencent, which reported substantial increases in capital expenditures compared to the previous year. This observation has raised speculations of a potential turnaround in domestic demand, particularly for companies like GDS Holdings, which has a significant advantage in overseas expansion.
Two Chinese companies with growing exposure to overseas markets, namely Temu parent PDD Holdings and Tencent, have attracted attention from investors and analysts alike. PDD Holdings, in particular, is scheduled to report its earnings soon, and its stock holds a high weighting in the CoreValues Alpha Greater China Growth ETF. This ETF, established in 2023, aims to provide an alternative approach to investing in Chinese stocks, with preferences given to companies that align with certain criteria and values.
Despite the potential for growth in certain Chinese companies, the overall market sentiment remains subdued. Chinese stocks in both Hong Kong and the mainland have struggled to make a significant recovery since the onset of the pandemic. The uncertainty surrounding growth prospects and government policies has added to the challenges facing investors in the Chinese market.
Ben Harburg, founder of CoreValues Alpha, expressed his skepticism about the current valuation of the U.S. stock market and its potential impact on Chinese stocks. He believes that a correction in the U.S. market could serve as a catalyst for the revival of Chinese stocks. However, he also highlighted the competition from other markets like Japan and India, which have been attracting capital that could have otherwise flowed into China.
The stock market in China presents a mixed bag of opportunities and challenges for investors. While certain companies show promise with their resilient market positions and overseas growth prospects, the broader market remains shrouded in uncertainty. As investors navigate through these complexities, active management and careful stock selection seem to be crucial in unlocking the potential for returns in the Chinese market.