Chinese Stocks Stage a Rally That’s Yet to Convince Global Funds

The MSCI China Index’s 27% gain since a January low mostly reflects a rotational play on cheap valuations, and Chinese earnings are yet to convince, according to Lombard Odier, Pictet Asset Management, and Fidelity International. Even optimists like abrdn plc are harping on the need for companies to show profit gains.

The MSCI China Index is currently trading at 10 times forward earnings, below its five-year average and 20.6 times for the S&P 500. The other driver for the recent gains lies in signs of more policy support from Beijing, in particular a desire to clear unsold homes in the depressed property sector. At the same time, the likelihood of US policy rates staying higher for longer has turned Chinese stocks into an alternative, with its tech names benefiting.

“Once seen as hunting ground for growth-focused investors, now Chinese equities are increasingly surfacing in value-focused portfolios,” said George Efstathopoulos, a portfolio manager at Fidelity. Still, “earnings need to deliver and for earnings to deliver we need to see consumer sentiment improving in China, something that remains somewhat fragile today.

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