Back to top

Image: Shutterstock

5 Reasons Chinese Equities Have Bottomed

Read MoreHide Full Article

Yesterday, I wrote a commentary explaining why I believe the next few months should be choppy for U.S. equities. However, just because trading in U.S. equities has become more difficult doesn’t mean opportunities abroad don’t exist. The old Wall Street adage goes, “There’s always a bull market somewhere.”

Over the past several years, Chinese stocks have been one of the most debilitating investments for bulls. The government’s anti-growth policies, stringent COVID-19 restrictions, and real estate crisis have led to a drawn-out bull market in Chinese equity proxies such as the iShares China Large-Cap ETF ((FXI - Free Report) ). FXI is down more than 40% over the past three years as investors have remained laser-focused on U.S. equities and other international markets.

Zacks Investment Research
Image Source: Zacks Investment Research

Nevertheless, 5 indicators strongly suggest that the worst is over for Chinese equities and a multi-year bull market is on the periphery, including:

Market Restructuring

As I mentioned earlier, for years, the Chinese government’s heavy-handed, non-free market stance has left a bearish cloud hanging over Chinese equities. However, UBS Group ((UBS - Free Report) ) and Goldman Sachs ((GS - Free Report) ), two highly respected banks, raised their outlooks on Chinese equities based on the government’s newest efforts to buoy the nearly $10 trillion Chinese equity market. More business-friendly reforms are poised to help China recover lost foreign investment due to regulation uncertainty.  

Valuations are Dirt Cheap

Though Chinese stocks like Alibaba Group ((BABA - Free Report) ) have been classic “value traps,” lately, valuations have become simply too attractive to ignore. For example, the e-commerce juggernaut has a price-to-book ratio of 1.15, the lowest p/b ratio in its history (BABA went public roughly a decade ago.

Zacks Investment Research
Image Source: Zacks Investment Research

Kitchen Sink Already Thrown at Chinese Equities

The ailing real estate market has been a significant bearish headwind for the Chinese economy. Evergrande, once the world’s most valuable real estate company, collapsed amid the Chinese real estate crisis. Because markets are forward-looking, they often bottom when the news looks the bleakest. For example, Bitcoin bottomed within days of the collapse of the FTX crypto exchange.

Billions in Buybacks

Chinese tech leaders like Alibaba, Tencent Holdings ((TCEHY - Free Report) ), and ((JD - Free Report) ) have each announced billions in buybacks over the past few months. Buybacks are a bullish catalyst for these stocks because they drive investor confidence while simultaneously decreasing dilution (the shares available to be traded). The buybacks are especially bullish for the main domestic proxy for Chinese internet stocks, the Krane CSI Internet ETF ((KWEB - Free Report) ).

Price Action

Chinese stocks have outperformed U.S. stocks and have exhibited classic relative strength clues. FXI and other Chinese proxies are on the brink of clearing the 200-day moving average. If the price can clear the 200-day, it signifies that the long-term trend has finally shifted in the bull’s favor.

Zacks Investment Research
Image Source: Zacks Investment Research

Bottom Line

A shift in government policy and four other bullish signals indicate that the bottom is likely in for Chinese stocks.

Published in