China’s equity sell-off has continued for a second day, amid rising Covid cases and China’s stance towards the Russia-Ukraine conflict, but some analysts urged investors to take the long view.
More than US$460bn was reported to have been wiped from China’s tech sector this year, with the Nasdaq Golden Dragon China Index sinking to its lowest since 2013, the Hang Seng breaching six-year lows, but the Shanghai Composite at levels seen in mid-2020.
In London, Asia-focused businesses were worst affected, with Prudential PLC (LSE:PRU) and Standard Chartered PLC (LSE:STAN) among the leading losers, and with miners also under pressure on concerns about a slowdown in Chinese demand.
Scottish Mortgage Investment Trust PLC (LSE:SMT), where Tencent, Meituan and Alibaba are among its top 10 holdings, was down 4% in early trade, near 18-month lows.
China revealed a sharp rise in Covid-19 infections today, with new cases more than doubling over 24 hours to a two-year high of 3,507.
The People’s Republic’s zero-tolerance "dynamic zero-Covid" approach aims to contain each outbreak as soon as it appears, which has resulted in a fresh lockdown in the province of Jilin, adding to the major industrial city of Shenzhen, which was locked down over the weekend.
Sentiment against Chinese stocks was exacerbated by JPMorgan downgrading 28 of the country’s internet-focused companies, labelling them as “uninvestable” over the next 12 months.
Analysts at the US investment bank downgraded the Chinese internet stocks to ‘underweight’, with the list including giants Alibaba, Baidu, Meituan, JD.com and Tencent,.
The Asian market ‘bloodbath’ comes as investors “weighed up the potential hit to corporate earnings and economic growth from new Covid lockdowns in China, particularly in the electronics manufacturing sector where disruption to production could lead to another supply chain crisis,” said Victoria Scholar, market analyst at Interactive Investor.
UBS chief investment officer Mark Haefele said the sell-off in new tech companies is “an overreaction to the delisting threat, in our view”.
This followed the US Securities and Exchange Commission (SEC) last Thursday naming five Chinese companies that may be delisted from US stock exchanges as soon as 2023 due to failure to comply with new audit rules.
“The SEC’s move is not unexpected,” Haefele said. “Under new US regulations, all foreign US-listed companies must allow US authorities to access their audit records or face delisting after two to three years of noncompliance.
“However, Chinese companies are prohibited from providing access without Beijing’s permission. We believe the five companies named by the SEC were cited because they were among the first US-listed Chinese companies to submit their 2021 annual reports. We expect more similar announcements in the coming weeks.”
UBS thinks the US and China could reach an agreement on auditing disclosures within the coming year, with the China Securities Regulatory Commission having said on Friday that it has continued to communicate with its US counterparts, and the talks have made "positive progress".
On China’s Covid containment measures, Haefele said this “may delay, but not derail, our expectations for a recovery in consumption this year”.
“We expect more near-term market volatility until there is more clarity on the effectiveness of these new containment measures. Based on previous lockdowns, China’s containment measures have been short and sharp.
“While the latest lockdowns could pose a downside risk to our expectations for China to ease its COVID mobility curbs in 2Q, we also note that the hit to sentiment from prior outbreaks has tended to be transitory.”
Beijing could also be moving to softening of policy in order to help encourage growth.
During the recent meeting of policymakers, the government unveiled targets that included growing GDP “around 5.5%” this year, with leaders acknowledging these targets will not be easy to achieve.
There was a pledge to step up policy support with more proactive and countercyclical measures, including upping fiscal spending and recognising the need to “increase new credit” from the banking sector.
“We urge investors to separate negative sentiment from the fundamental growth prospects of Chinese equities. We continue to believe that solid teen percentage earnings growth this year will spur valuation reratings,” said Haefele, who expects the coming months to see "evidence of policy implementation and further monetary policy easing to drive the market and lift sentiment".