Valuations in China's stock market are collapsing in the new year, adding pressure on shares of some of the most respected companies trading in the world's second-largest economy.
These sharp January declines came after several years of losses for the Hong Kong-based Hang Seng Index, along with other indexes that track the performance of mainland stock trading, according to FactSet data.
So far, the deepening sell-off has sparked debate on Wall Street over whether Chinese stocks have been bombed enough to justify selling them on the cheap.
Let's take, for example, Alibaba Holding Group, BABA.
For example. The company currently trades at a forward price-to-earnings ratio of about eight, the lowest since its 2014 IPO, according to FactSet data. It is currently trading at around $73 a share on Tuesday, having risen 6.9%, putting it on track for its best daily session since July.
While investors are typically wary of trying to “catch a falling knife,” to use the markets' terminology for timing a bottom, at least one veteran analyst shared some thoughts on what it might take for Chinese stocks to see a lasting rebound.
“The bottom line is that Chinese stocks have been hurt by a series of (mostly) self-inflicted wounds from a political standpoint, and until there is evidence that the authorities are committed to stimulating growth or reducing regulatory intervention, we should expect continued pressure on Chinese stocks.” Tom Isay, founder of Sevens Report Research, said in a note Tuesday.
As Essaye points out, Chinese stocks have struggled for years now, with the Shanghai-based CSI300 Index XX:000300 falling to a five-year low on Monday. Meanwhile, the Hong Kong-based Hang Seng Index (HK:HSI) rose,
Home to many of the mainland's largest companies, it hit a 14-month low, according to FactSet data.
What would it take for Chinese stocks to see a lasting rebound? According to Isai, while the sell-off in Chinese stocks is starting to look overdone, he is not yet convinced that companies like Alibaba represent a clear “buy” at current valuations.
Isaye said changing his mind would require two major policy changes at the highest levels of the Chinese government.
First, international investors will need to see evidence of real, meaningful stimulus from the People's Bank of China. Hopes for a rate cut from the central bank were dashed on Monday, adding pressure on Chinese stocks.
But more important than increasing central bank stimulus, Chinese authorities need to prove again that they can be more business-friendly, following crackdowns targeting the country's largest technology companies.
“So far, there is little evidence of either,” Isaye said.
FactSet data showed that Chinese stocks fell for three straight years through the end of 2023. However, the iShares China Large-Cap ETF FXI is full of well-established and profitable technology giants like Alibaba Group Holding Ltd.
JD.com Jordanian Dinar,
tencent holdings 700,
And others.
As a result, Chinese stocks are currently among the most beaten down and hated anywhere in the world, Isaye said. This alone may enhance its appeal to some investors with a contrarian streak who have enough money to wait out any further declines.
Chinese stocks saw a strong rebound early Tuesday, following a report that Beijing is considering a $278 billion package to support the country's stock market. The news sent shares of Chinese companies broadly higher, with gains concentrated among big Chinese technology names such as members of the KraneShares CSI China Internet ETF KWEB..
be seen: Hang Seng jumps from lows after report on Beijing's $278 billion support package
But few on Wall Street expect Tuesday's rebound to mark a turning point for Chinese stocks.
“The short answer is we probably have to see more pain” in Chinese stocks before a compelling bullish thesis emerges, Matthew Tuttle of Tuttle Capital Management told MarketWatch via email.
