As summer vacation ends, Chinese investors are beginning to accept that consumption and growth will remain subdued for some time. JPMorgan on Wednesday was the latest firm to downgrade China stocks to neutral from overweight “due to a challenging outlook,” the team led by emerging markets equity strategist Pedro Martins said. Instead, JPMorgan increased its overweight recommendation on other emerging markets. Even after this change, JPMorgan still holds 18 Chinese stocks in its global emerging markets model portfolio. “We maintain our preference for select internet companies (growing at reasonable prices) and rising shareholder returns, with the AI theme playing out once the current integration is complete,” the analysts said. “Consumer and real estate sectors remain underpinned by domestic concerns Impact, bottom-up stock picking opportunities are few.” Chinese policymakers acknowledge weak domestic demand but have yet to take meaningful action to boost consumer confidence. JPMorgan analysts said uncertainties about China’s economic outlook include tensions with the United States and “lingering deflationary pressures.” Unlike in the United States, consumer prices in China barely rose last year, weighed down by a housing downturn and worries about future income. China’s August consumer price index, due out at 9:30 pm Eastern Time on Sunday, is expected to rise just 0.7% year-on-year, according to analysts polled by Reuters. Prior to JPMorgan’s downgrade, Nomura Securities downgraded MSCI China’s rating from overweight to neutral late last month. “Continuing disappointment” said a team led by Chetan Seth, Asia ex-Japan equity strategist at Nomura Securities. Fire'” said an Aug. 25 report. Nomura analysts added: “We are concerned that the U.S. election may become an overhang for the market.” Analysts pointed to attractive valuations and the possibility of stimulus expectations spurring a short-term rebound as they refrained from fully downgrading Chinese stocks to underweight. Reason for rating. Sino-U.S. relations stabilized last year, but analysts believe uncertainty over November’s U.S. presidential election is why Beijing is delaying domestic stimulus. U.S. national security adviser Jake Sullivan visited Beijing in late August for three days of formal meetings, during which he said Vice President Kamala Harris agreed with President Joe Biden that maintaining high-level communication is a negative ways to manage bilateral relations responsibly. Harris and former President Donald Trump are scheduled to debate Tuesday. Liu Wen, China equity strategist at JPMorgan Chase, said that in the three periods when Sino-US trade tensions escalated in 2018 and 2019, the MSCI China Index fell each time. But she found that China’s utility sector outperformed the broader market, with an average return of 12.8%. As part of the downgrade of Chinese stocks, JPMorgan increased its holdings in state-owned utility operator China Resources Gas, while removing shares of Pinduoduo, China Construction Bank and Kingdee International. The bank’s updated global emerging market model portfolio includes online-related companies Alibaba, Tencent, Kuaishou Technology and Meituan Dianping – all of which are individually rated “overweight” by J.P. Morgan. But when it comes to what J.P. Morgan calls emerging market growth and value picks, only one Chinese stock makes both lists: Hong Kong-listed short video company Kuaishou. The video app, a smaller rival to TikTok parent ByteDance, beat analyst expectations for second-quarter revenue and profit, according to FactSet. Average daily active users increased to 395.3 million from 376 million a year ago. JPMorgan Chase set Kuaishou’s target price at HK$65, an increase of more than 60% from Thursday’s closing price. The stock has fallen more than 20% so far this year. The Wall Street investment bank selects value stocks based on cash flow and upside potential and growth stocks based on historical and expected sales growth. —CNBC’s Michael Bloom contributed to this report.
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