Investors see Chinese stocks in a new light

Institutional investors are beginning to see Chinese stocks differently. After months of selling, global investors have again become net buyers of Chinese stocks — for the first time since March.

Catch up: Why are Chinese stocks down so drastically?

Four things helping China bulls…

Low valuations, supportive government policies, improving earnings and lockdowns easing — per the Investment Director of GAM, Jian Shi Cortesi (BBG).

The majority of citizens in Shanghai are out of a two-month COVID-19 lockdown, and “when you remove restrictions you can see a really strong bounce,” per Insight Investment Head of Macro Research (FT).

• Changing sentiment: Morgan Stanley, the only Wall Street group to “recommend staying clear of Chinese assets” for the past year, said sentiment was improving (BBG).
• Improving earnings: Chinese companies, including Alibaba and Baidu, have reported better-than-expected earnings, and analysts are raising earnings forecasts on Chinese stocks again.

In 2019, Trump imposed tariffs on $300B worth of Chinese imports. Biden is also reportedly considering ending tariffs on some of these Chinese imports to lower inflation.

DiDi lifts the spirits of international investors…

As of Monday, DiDi Global is up 20% since the WSJ reported that China is concluding its regulatory probe on the company — which dragged it down over 80% in the past year.

• Chinese regulators are also finishing their data security probes into shipping platform Full Truck Alliance (NYSE:YMM) and recruitment platform Kanzhun (NASDAQ:BZ).
• The stocks of both companies jumped on Didi’s news but companies are expected to face financial penalties in conclusion to their probes.

In March, it was reported that China would complete its tech crackdown “as soon as possible.” Investors didn’t know how serious those claims were — but according to Bloomberg analylst Marvin Chen, the investigation into DiDi is a “sign that regulators are following through” (BBG).

Investors: Where to start?

In May, JPMorgan said “the first batch of outperformers” would be in the digital entertainment, local services and e-commerce sectors (CNBC).

• They also upgraded several Chinese stocks in these sectors, including Alibaba (NYSE:BABA), NetEase (NASDAQ:NTES) and Pinduoduo (NASDAQ:PDD).
• The ETF way: The iShares MSCI China ETF (NASDAQ:MCHI) — a basket of Chinese stocks available to international investors — is up 14% in the past month. The ETF is still down 43% from its peaks.

Dive Deeper: This fund manager returned 30x over five years in his Chinese hedge fund — here’s his strategy.