Goldman, JPMorgan flag caution on Chinese stocks

Bloomberg Singapore | Updated on August 12, 2019 Published on August 12, 2019

Goldman trims MSCI China EPS estimates.   -  Bloomberg

JPMorgan says investor flows show China stocks are overbought

Chinese stocks might be about to face more headwinds.

Goldman Sachs Group Inc. cut its earnings-per-share estimates for the MSCI China Index amid increased U.S.-China trade frictions and lower potential for valuations to rise, while JPMorgan Chase & Co. says investor flows show that the country’s stocks are currently overbought.

Estimated EPS growth on the MSCI China Index for 2019 will be 6 per cent from 8 per cent and in 2020, 9 per cent from 10 per cent, Goldman strategists led by Kinger Lau wrote in a note Saturday. That’s as market-implied probability of a trade resolution falls to 12 per cent and Goldman’s economists no longer expect a trade deal before the 2020 U.S. presidential election. They have a 12-month target of 82 for the index, to September 2020, implying a gain of 12 per cent through then.

Positioning measures including margin transactions suggest that leveraged institutional investors, such as hedge funds, rather than retail, are more likely to have been responsible for this years rally in Chinese onshore equities, strategists led by Nikolaos Panigirtzoglou wrote in a note Friday. There has been a sharp increase in net long positions by futures investors this year, according to the strategists.

The Chinese equity market looks currently pretty overbought especially compared to last year, the report said.

Chinese stocks enjoyed a heady rise at the beginning of the year, with the MSCI China gauge rallying 23 per cent from the start of 2019 through early April as fears about an economic downturn subsided and the Peoples Bank of China loosened some policy measures.

The index, which has large- and mid-cap stocks and covers about 85 per cent of the Chinese equity universe according to MSCI, has fallen 16 per cent in the past four months as concerns about trade and earnings have come back to the fore. Its now up 2.8 per cent in 2019, compared with a 16 per cent gain for the S&P 500 Index and a 12 per cent advance for the MSCI All-Country World Index.

While China’s equities are likely overbought, the yuan appears to be oversold, JPMorgan said, citing a steady rise in long dollar/short yuan positions since mid-2018. The strategists also noted that Chinese onshore bonds should benefit from increased expectations of rate cuts by the Peoples Bank of China in an escalation scenario.

FX investors have been preparing for a Chinese currency depreciation for some time, the strategists said. So from an investor positioning perspective, Chinese onshore equities look more vulnerable than the Chinese currency if the U.S.-China trade war escalates further from here.

Published on August 12, 2019
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