Chinese stocks have given up much of their recent gains as investors debate whether the bottom is really in. Fresh data only seem to reinforce how China’s problems can’t be fixed in a few days, while questions swirl around how much — or how willing — policymakers are to act. One theme that hasn’t changed in such an uncertain environment is playing specific stocks. Evercore ISI strategists said many U.S.-listed Chinese stocks are “oversold” and expects those “trading at depressed valuations with an attractive [earnings per share] backdrop to outperform,” analysts said in a Jan. 28 report. They screened for names with more than $1 billion in capitalization and expectations for earnings growth in the next two years. Another criteria was whether the stock is trading at a more than 50% discount to their 10-year average price-to-earnings ratio or more than 50% below its pandemic peak. Part of Evercore’s thesis is that Beijing will take further policy action after an annual parliamentary meeting in early March. The People’s Bank of China has announced a 50 basis point cut to the reserve requirement ratio, effective Monday. The Lunar New Year, China’s biggest holiday of the year, essentially kicks off the following Friday and lasts for an entire week. Such signals come at a time when Chinese stocks have sold off sharply. Evercore pointed out that, at the time of its report, more than 85% of stocks in Hong Kong’s Hang Seng Index traded below their 200-day moving average — “an extreme which in the past coincides with bottoms and strong reversals.” The Shanghai Stock Exchange’s A share index has also fallen below a so-called National Fate Line going back to around 2005, Evercore said. Chinese stocks – whether measured by those that trade in the mainland, Hong Kong or U.S. – have fallen for more than two years. That’s meant funds that have done well have had a value tilt in recent years . “Whether it will necessarily change from value to growth is difficult to predict,” Rachel Wang, director of manager research, China, at Morningstar, said in Mandarin translated by CNBC. She noted that over the last few months, investors have shifted away from high-risk to low-risk products, from stocks to fixed income. Worst yet to come? The Shanghai composite closed nearly 1.5% lower Friday, below where it closed at the start of the recent rally on Jan. 23. Those interim gains had followed news of the PBOC cut and media reports that indicated renewed state efforts to support markets and growth. The Hang Seng Index closed 0.2% lower Friday, still holding above its Jan. 23 close. Some remain skeptical the markets have seen the worst. “The most important thing for foreign investors to understand is that unlike in the U.S., stock market performance has very little influence over Beijing’s macro thinking,” Clocktower Group said in a Feb. 1 report. “Until the market collapse transmits to the real economy and threatens social stability, we doubt that a risk asset selloff alone would be able to drive a fundamental shift in policy,” the report said. Clocktower expects any turning point would come from a dramatic drop in housing prices, which would erase many households’ lifetime savings. Regardless, what the longer-term trend in data show is that China is entering a new phase of growth, after decades of double-digit expansion. Understanding the need to look more at company competitiveness and individual returns can help investors in this environment, said Ye Yuhua, manager at Guangzhou-based Liangdian Private Capital. “In the past Chinese companies grew rapidly, many companies’ results grew exponentially,” he said in Mandarin, translated by CNBC. “In this situation in the past, investors might have paid too much attention to growth.” The largest U.S.-listed Chinese companies by market capitalization on Evercore ISI’s screen — internet tech giants Alibaba , Baidu and JD.com — are expected to post single-digit increases in earnings this year, followed by growth of around 10% next year. In contrast, lesser-known names on the screen – fintech company Lufax , electric car company Li Auto and recruiting site operator Kanzhun – are projected to have double-digit earnings growth this year and next, the Evercore report showed. Alibaba is set to report December quarter earnings on Wed. Feb. 7, while the other companies have yet to schedule a release date. — CNBC’s Michael Bloom contributed to this report.
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