Investors in Chinese stocks are growing increasingly frustrated as hopes for a long-awaited earnings recovery continue to be dashed, leading to a unraveling of a recent rally. Earnings estimates on key Chinese gauges have been slashed by the most in Asia this year, as a deepening housing slump and sluggish retail sales weigh on confidence. The MSCI China Index has dropped more than 8% since its mid-May peak, leaving investors wary of the market’s future prospects.
“We’ve now seen 11 straight quarters of earnings misses for MSCI China and the analyst consensus hasn’t really gotten to grips with just how weak the underlying growth environment is in China,” said Jonathan Garner, chief Asia equity strategist for Morgan Stanley. “You have to be selective to be involved in China. There’s also more competition going on, particularly in sectors like e-commerce.”
Optimism that corporate performance would improve had fueled a bull run earlier this year, attracting global funds back into the market. However, the recent slide has reignited fears of past selloffs, as geopolitical tensions and regulatory crackdowns loom large. The Shanghai Composite Index and the CSI 300 Index have both seen their consensus earnings estimates drop by more than 6% this year, highlighting the challenges facing Chinese companies.
Foreign investors have been selling off onshore stocks for nine consecutive days, withdrawing over $5 billion in the longest stretch of outflows since August 2023. This trend has led to a wait-and-watch approach among fund managers, with many now underweight on Chinese stocks.
While some investors had hoped that Beijing’s market-supportive policies and a property rescue package would turn the tide, weak data and ongoing challenges have dampened those expectations. As the slide continues, doubts are growing, with concerns over the upcoming third plenum in July, a key political event that could shape the future direction of Chinese stocks.
Analysts warn that the consensus earnings estimates for Chinese stocks may be overly optimistic, and investors should proceed with caution. The risk of disappointment looms large, and the market’s future remains uncertain as investors grapple with a challenging economic environment in China.
