Chinese stocks outperform and there are reasons that can continue

Chinese stocks have outperformed U.S. stocks in the past month, and there’s good reason to believe they can continue to outperform for the rest of the year.

Let’s get the bear market over with

The iShares MSCI China ETF (NASDAQ:MCHI) — an ETF that tracks an index containing Chinese equities available to international investors — is up 9% in the past month, while the S&P 500 is down 3%.

China’s market decline was nearly a year ahead of the U.S.

• The MSCI China Index — a benchmark for Chinese stocks — peaked in February 2021 and fell nearly 35% through the rest of the year.
• In the same period, the S&P 500 — the benchmark U.S. index — rose another 20% before beginning its decline in 2022.

Last week, China reported better than expected economic data — a big surprise to Johanna Chua of Citigroup Global Markets Asia. Economists expected retail sales and industrial production to decline — instead, both grew at strong rates.

Inflation is much lower in China compared to the U.S.…

…Which gives China the flexibility to implement economic policies to support the economy. In May, China’s Consumer Price Index (CPI) — a measure of inflation — grew 2.1% compared to 8.6% in the U.S.

• The U.S. is raising interest rates, while China lowered interest rates last month to boost its housing sector.
• On Monday, Shanghai Securities News reported that China is planning “extraordinary” new policies to help manufacturers impacted by rising material costs.

And there are signs of China ending its crackdown on the tech sector. Remember in 2020 when the Chinese government halted the IPO of Ant Group following its founder Jack Ma’s criticism of the Chinese banking sector? Last Friday, China approved Ant Group’s application to set up a holding company — paving the way for an IPO (Reuters).

Investors: Retail investors go bargain hunting

“When risk appetite returns, those (that) have been beaten up the most rally the first,” per David Waddell, Chief Investment Strategist of Waddell & Associates on Chinese equities (BBG).

• Chinese education platforms like New Oriental Education (NYSE:EDU) and TAL Education Group (NYSE:TAL) — which fell over 95% since early 2021 — have more than doubled from their bottoms in recent months.
• Chinese electric vehicle stocks also jumped in the past month — with NIO (NYSE:NIO) rising 44% and Li Auto (NASDAQ:LI) rising 53%.

But Henry Guo of M Science LLC thinks the rally in education stocks results from bargain-hunting retail investors — and isn’t sustainable (BBG).

What happens in a bear market? A Societe Generale SA analysis showed that during 11 of the bear markets since 1987, Asian stocks outperformed U.S. stocks more than half the time.