Due to a combination of easing Covid restrictions and a more relaxed regulatory environment, Morningstar is bullish on Chinese gaming and e-commerce stocks.
“In the past, people were more concerned about the impact of regulatory tightening on the long-term value of these companies but based on what we have seen in the past few quarters, regulatory concerns are clearly easing,” Ivan Su, senior equity analyst at Morningstar, said at the independent research firm’s Asia Equity Market Outlook event.
“The more pressing question now is when the macro environment will improve, which translates to an improvement in financial performance for these companies as well.”
He noted that after a 263-day long freeze, regulators have given out five batches of gaming licences to video game makers, while the largest game makers such as Tencent, NetEase and CMGE all received new licences in September.
In terms of stock picking, he believes investors should stay selective and choose companies that have higher sales.
Another sector that Su prefers is e-commerce as consumer sentiment starts to improve.
“Thanks to more supportive government policies, easing Covid-19 disruptions and the government’s call for minimising logistics and production disruptions amid its zero-Covid-19 policy, we think there will be a gradual recovery in Chinese e-commerce in the fourth quarter,” said Su.
Yet, he believes there are still some near-term uncertainties as zero-Covid policies will continue to put pressure on consumer spending.
He believes China’s consumption slump should have bottomed out in the third quarter and the year-over-year growth in online sales should gradually recover.
“We are more focused on the longer-term framework so we still prefer stocks with a stronger economy moat.”
Despite slowing growth, Morningstar also identified banks in Hong Kong and Singapore as likely to outperform during the last three months of 2022.
“The outperformance of Singapore and Hong Kong banks was supported by the expectation of improved profitability in the medium term. This is supported by the normalisation of global policy rates to combat inflation,” said Michael Wu, senior equity analyst at Morningstar.
“In the second half of 2023, we expect high interest rates to continue to bolster banks’ net interest margins; we expect profitability to improve.”
In Singapore, Wu believes DBS and UOB, which has acquired Citibank’s retail consumer business, are likely to be the sector leaders for the next quarter and going into 2023.
Yet, he also warned that a sharp contraction in economic activity could see slippage in asset quality in the next two years. Overall, he thinks the banks are generally well provisioned though and their high profitability would be able to cushion any downside risk.