Pictet Asset Management has downgraded its outlook on China equities after conceding that the country’s reopening rally had “not quite lived up to expectations”.
A relief rally, which began in November upon early indications that Beijing was beginning to unwind some of its draconian Covid-19 measures, began to fade in February, largely as a result of the souring in global macro backdrop.
Many analysts predicted at the time that the reopening rally was not done as Chinese equities still look extraordinarily cheap both on a relative and historical basis, while there was hope that an improving macro backdrop would trigger companies back to a positive earnings revisions cycle.
That has largely not materialised, which prompted Pictet AM to downgrade its outlook on China equities to neutral from overweight.
“The man who waits for a roast duck to fly into his mouth will wait a long time. So goes an old Chinese saying. When it comes to Chinese equities, we believe we have waited long enough,” it wrote in its Barometer of Financial Markets June outlook.
“The country’s reopening after the pandemic has not translated into positive sentiment on corporate earnings while its economic recovery has not quite lived up to expectations, either. In recent weeks, geopolitical risks have also intensified. All of which means it is time to downgrade to Chinese equities to neutral.”
Although, Pictet AM cautioned that this was a tactical decision and it may still revise its outlook on Chinese equities.
“This is a tactical decision,” it wrote.
“Valuations for Chinese stocks are still attractive (as a consequence of recent poor performance, China is now the second cheapest region in our model, after Eastern Europe).
“And we might yet see the economic recovery play out, as anticipated by our economics team. Over the medium to long term, we still see strong potential for Chinese assets.”
Elsewhere, Pictet AM closed its underweight position on European stocks, citing better-than-expected economic growth, while it also upgraded technology to overweight, citing the sector’s high profitability and low leverage.
Healthcare stocks have gone in the opposite direction, downgraded to neutral, while financials have been downgraded to underweight.
In relation to fixed income, Pictet AM upgraded eurozone high-yield debt to neutral from underweight.
“The asset class should outperform its US counterpart, which is under pressure from the regional banking crisis and tightening lending conditions,” it wrote.
“US high yield bonds also face challenges from a tighter regulatory environment – the Fed is poised to present new capital rules in the coming months – and low demand for credit.”