Societe Generale joins UBS, Mark Mobius in turning bullish on Chinese stocks
- The French bank says the pace of earnings downgrades in China was dropping and earnings breadth had improved
Societe Generale has turned positive on shares of Chinese companies for the first time since December 2022 as hopes of policy support and earnings improvement drive investor confidence in the world’s second-biggest stock market.
The French bank raised its recommendation to overweight from neutral, a rating it had maintained since the end of 2022, analysts led by Frank Benzimra said in a quarterly report on Wednesday. It prefers Chinese offshore stocks and recommends buying large-caps and those with solid earnings and stable dividend payouts.
“Earnings green shoots are emerging,” the report said. “In increasingly expensive markets elsewhere, the risk-reward of China equity investing has improved.”
The MSCI China Index of the biggest onshore and offshore Chinese stocks has rebounded by as much as 32 per cent from a January low after state-led buying and a barrage of measures to bail out the property market lifted sentiment. Although the market has fallen more than 7 per cent from a May high, Goldman Sachs said the pullback posed no risk to the general uptrend and the momentum had legs.
While first-quarter earnings for Chinese companies were largely mediocre – overall results being 8 per cent below the consensus estimates – earnings started to show strength on a sequential basis, Societe Generale said. It added that the pace of earnings downgrades was dropping and that the earnings breadth had improved.
Chinese companies will be able to meet the consensus projection of a 4 per cent revenue growth this year, which is closer to China’s GDP growth forecast, and the risk of earnings disappointment for the year is low, it said.
The French bank prefers offshore stocks to onshore ones trading on the mainland’s exchanges, because of the valuation discount between the two markets, strong inflows from the stock connect’s southbound channel and the large dividend yield gaps.
Given the earnings recovery is nascent, Societe Generale recommends investors stick to big-capitalisation stocks and to companies that have earnings visibility and pay stable dividends, such as Tencent Holdings, PDD Holdings and Ping An Insurance.
Meanwhile, the bank lowered its rating on South Korea’s market to neutral from overweight and raised that on Malaysia to neutral from underweight, while maintaining a neutral position on India and retaining underweight on Indonesia and Thailand.
