The recent quarterly reports from major Chinese companies emphasize the need for meticulous stock selection in the local market. According to Lorraine Tan, director of Asia equity research at Morningstar, there has been noticeable outperformance among specific companies, indicating a trend where weakness is more prevalent across the board. She points out that the companies that have outperformed are those with a more resilient product mix or strong market positions. This insight suggests that the success of certain companies is not reflective of the overall market climate in China.
Alibaba and Tencent, two prominent Chinese companies, have reported significant increases in their capital expenditures compared to the previous year. These investments amounted to $1.66 billion and 8.73 billion yuan ($1.22 billion) for Alibaba and Tencent, respectively, in the quarter ending June. The rise in capital expenditures could signal a potential turnaround in domestic demand, as noted by Morgan Stanley’s China equity strategist Laura Wang and her team. This observation is particularly relevant for companies like GDS Holdings, which has been identified as having a first-mover advantage in overseas expansion, including a strategic land agreement in Malaysia.
Companies like PDD Holdings, the parent company of Temu, are increasingly expanding their exposure to overseas markets. As PDD Holdings prepares to report earnings, its growing presence in international markets is a key highlight. Additionally, the CoreValues Alpha Greater China Growth ETF (CGRO) has shown interest in Chinese companies with significant growth potential. With a focus on not compromising American tech, economic interests, or values, the ETF emphasizes the importance of selecting companies that align with certain criteria.
While the CGRO ETF has faced a 4.3% decline year-to-date, outperforming other ETFs like KraneShares CSI China Internet ETF (KWEB), there is still room for improvement. According to Ben Harburg, founder of CoreValues Alpha, trading in the Chinese market requires an active approach rather than a passive one. The volatility and complexity of the market necessitate frequent portfolio adjustments to capitalize on emerging opportunities.
Despite the challenges faced by Chinese stocks in Hong Kong and mainland China in recovering from the pandemic, there is cautious optimism for a potential turnaround. Harburg predicts that the catalyst for upliftment in the Chinese market may come from a correction in the U.S. stock market, rather than stimulus measures from Beijing. This external factor could influence investor sentiment and create opportunities for Chinese stocks to regain traction.
The latest quarterly reports from major Chinese companies underscore the importance of strategic stock selection and active portfolio management in navigating the dynamic market landscape. By identifying companies with resilient business models, significant growth potential, and adherence to specific criteria, investors can position themselves to capitalize on emerging opportunities in the Chinese market.