As China navigates a complex economic landscape, local investors are being advised to adopt a more conservative approach in their stock portfolios for the second half of the year. This recommendation comes amid concerns over potential market volatility and geopolitical uncertainties. “We caution against a potential volatility surge in the next month or two,” stated a report by Morgan Stanley’s chief China equity strategist, Laura Wang, on Thursday.
The sentiment towards mainland Chinese stocks, commonly referred to as “A Shares,” has declined recently. This downturn is attributed to the lack of significant growth measures from Chinese policymakers, with no major interventions expected during the upcoming Politburo meeting. Additionally, the looming deadlines for U.S. trade agreements, particularly the 90-day tariff truce with China expiring in mid-August, further contribute to investor caution.
Market Dynamics and Investment Strategies
Despite the challenges, mainland China stocks experienced a slight increase last week, contrasting with the decline in Hong Kong’s tech-heavy stocks. Morgan Stanley’s Wang continues to support certain AI investments but also emphasizes the importance of “maintaining some exposure to dividend yield plays.” Among the recommended stocks is Hong Kong-listed Chinese insurer PICC P & C, noted for its 4.5% dividend yield and growth potential in auto insurance.
In a strategic move, Morgan Stanley replaced PICC with Pop Mart, known for its Labubu toys, on its China-Hong Kong Focus List in mid-June. This shift reflects a broader trend among local analysts who are increasingly highlighting high-dividend stocks in their outlooks for the remainder of the year.
Expert Opinions and Market Trends
UBS Securities China equity strategist Lei Meng echoed this sentiment, emphasizing the focus on fund flow structures and market styles amid uncertainties. “Medium- and longer-term investors favor high-dividend stocks and banks, supported by increased state-backed stock buying,” Meng stated in a report last Monday. He anticipates a slowdown in inflows into tech-related sectors after significant allocations in the first half of the year.
The initial optimism towards Chinese AI stocks earlier this year has tempered, with the broader economic growth outlook remaining subdued. This shift is evident in the varied performance of market indices. Hong Kong’s Hang Seng Index, dominated by tech giants like Alibaba Group and Tencent Holdings, surged by about 20% in the first half of the year. In contrast, mainland China’s Shanghai Composite, which includes more state-owned enterprises, rose by less than 3%.
Investor Sentiment and Global Comparisons
Amid these dynamics, mainland Chinese investors are increasingly drawn to high-yielding stocks, seeking better returns than those typically available domestically. A late June report by J.P. Morgan, led by Wendy Liu, highlighted preferred high-yielding stocks such as PetroChina and CR Power, offering dividend yields of 7.3% and 6.1%, respectively. Both companies are listed in Hong Kong.
This growing interest from mainland investors coincides with tighter restrictions on accessing U.S. and other international markets. Meanwhile, global institutional investors continue to view U.S. stocks as the least risky, with options to diversify into Europe, China, or emerging markets. Liqian Ren, head of quantitative investment at WisdomTree, noted that for “investors outside China, the unglamorous stocks [such as utilities], it’s not going to be where they park their cash.” Ren also pointed out that leading Chinese AI companies, like ByteDance, remain unlisted, limiting investment opportunities.
Looking Ahead: Navigating Uncertainty
The current investment climate in China underscores the need for strategic adjustments as investors brace for potential volatility and geopolitical shifts. With the expiration of key trade agreements on the horizon and the absence of aggressive policy interventions, the focus on high-dividend stocks and conservative plays appears prudent.
As the second half of the year unfolds, market participants will closely monitor policy developments and global economic trends to navigate these uncertain waters. The emphasis on dividend yield plays and strategic sector allocations reflects a broader strategy to mitigate risks while capitalizing on available opportunities.