The investment landscape in China is prompting a more cautious approach from local stock investors as they brace for the second half of the year. Analysts at Morgan Stanley, led by chief China equity strategist Laura Wang, issued a warning about the potential for heightened market volatility in the coming weeks. Their report released Thursday noted a decline in sentiment toward mainland Chinese stocks, or “A Shares,” attributed to a lack of stimulating growth measures from policymakers. This sentiment is unlikely to change during an anticipated Politburo meeting later this month.
As investors focus on the upcoming deadline for U.S. trade negotiations, which will conclude on July 9, concerns are growing over an impending expiration of the 90-day tariff truce with China set for mid-August. Despite a slight uptick in mainland China stock performance last week, Hong Kong’s tech-focused market experienced a decline, suggesting shifting investor dynamics.
In terms of investment strategies, Morgan Stanley continues to recommend various artificial intelligence stocks while also advocating for maintaining exposure to high dividend yield investments. One of their preferred near-term picks is Hong Kong-listed Chinese insurer PICC P & C, which offers a dividend yield of 4.5% and stands to benefit from the growth in the auto insurance sector. Following a mid-June adjustment, PICC replaced Pop Mart, the toy manufacturer known for Labubu, on the bank’s China-Hong Kong Focus List.
Additionally, other analysts are spotlighting high-dividend stocks as a promising avenue for investors navigating uncertainties. UBS Securities China’s equity strategist, Lei Meng, observed in a report last Monday that medium- to long-term investors appear to favor high-dividend stocks and banks, buoyed by increased state-supported stock purchases. Meng anticipates a slowdown in inflows into tech sectors during the second half of the year after substantial investments in the first half, indicating a shift in market focus.
The performance of various stocks highlights this trend, where Hong Kong’s Hang Seng Index—largely influenced by tech giants like Alibaba and Tencent—saw a notable 20% increase in the first half of the year. In contrast, the mainland Shanghai Composite, heavily featuring state-owned enterprises, gained less than 3%. A report from J.P. Morgan, led by Wendy Liu, noted a significant interest among mainland investors in high-yielding Chinese stocks, such as PetroChina and CR Power, which boast dividend yields of 7.3% and 6.1% respectively. This increase in demand coincides with growing restrictions for mainland investors accessing U.S. and global markets.
Meanwhile, global institutional investors appear to favor U.S. stocks as the safest investments. Liqian Ren, head of quantitative investment at WisdomTree, remarked that outside of China, less glamorous sectors like utilities are not likely to attract significant investment from these international players. Furthermore, she pointed out that several prominent Chinese AI firms, including ByteDance, are not publicly traded, limiting investment opportunities in that sector. —Finance Newso’s Michael Bloom contributed to this report.
