Big banks get bullish on Chinese stocks

2021 was a tough year for US-listed Chinese stocks. Chinese government crackdown on tech and educational stocks along with fears over delisting of Chinese stocks from US exchanges led to a massive sell-off. But the tides may be turning green for the red flag stocks as big banks get bullish on China.

China’s big fall in 2021

iShares MSCI China ETF (NASDAQ:MCHI) — a broad ETF providing exposure to Chinese stocks — is down by more than 30% since a year ago. However, historical data of $MCHI shows the Chinese market recovering each year after a drop of over 20%.

• 2008: dropped 52.2% — 2009 increased 58.8%.
• 2011: dropped 20.4% — 2012 increased 18.7%.
• 2018: dropped 20.31% — 2019 increased 20.36%.

If history repeats itself, 2022 could be a strong year for Chinese stocks — which are looking cheap based on the CAPE (Cyclically Adjusted PE) ratio at 14x compared to the US at 37x and Europe at 23x.

Big banks change tunes on Chinese stocks…

Institutional banks are generally cautious with Chinese stocks. But now, Bernstein and Goldman Sachs and others are getting bullish on China and here’s why:

• Government support: While the Feds are hiking interest rates to tackle inflation, the People’s Bank of China is cutting rates to stimulate growth.
• Politics: The Chinese Communist Party’s 20th National Party Congress will be hosted this year in Nov — an event associated with pro-economic growth policies.
• Regulation: The worst of the anti-monopoly regulations appear to be behind us.

While inflation hit 40-year highs in the US, inflation pressures in China are easing — with China’s producer price index rising 9.3% in January, slower than expected. Debt problems from China’s largest property developers last September also haven’t blown up in global investor faces.

Investors: Proceed with caution

Still, some institutional skeptics remain — with Morgan Stanley, Bank of America and J.P feeling lukewarm on China.

• Earlier this week, rising tensions between China and India — from India’s ban of 54 Chinese apps — have caused collateral damage…
• Sea Ltd (NYSE: SE) — the Singaporean e-commerce and gaming company partly owned by Tencent, which generates 10-15% of its game bookings from India — fell 13% after being included on India’s ban list.

As the two economic giants’ rivalry increases, investors should be cautious of Chinese-related stocks — at least until the dust settles. To avoid regulatory impacts on a single industry or company, investing in China-based ETFs can provide broad diversification.

Earnings time: Alibaba is set to report earnings today.