Analysts Wary On China Valuation After $1-Trillion Wipeout

Any veteran investor will tell you that financial markets overshoot when trouble hits, but what if that market is the world's second-largest economy and the government has decided the rules of the game have changed? Tom Arnold and Marc Jones reported for Reuters.

Photo Insert: The Shenzhen financial district

China's months-long regulatory crackdown has included big names in e-commerce, the gig economy, exam cramming, and most recently online insurance. Close to $1 trillion in market value has been wiped off China Inc. since February.

For big firms that also list on markets like Wall Street because it brings in international investment, 2021 is already the worst year since the global financial crisis.

It could spring back of course, but there's the rub. Many analysts are convinced things will settle, but only the Beijing ruling elite know if and when that might be.

"Investors have been jolted," said Paul O'Connor, head of multi-asset at Janus Henderson. "This will weigh heavily on the outlook for profits, valuations, and investor sentiment in China."

Morgan Stanley estimates MSCI China, which has seen one of its biggest lags on record versus world stocks this year, now trades at 13.9 times 12-month forward price-to-earnings, a 5% premium over MSCI's broader emerging market benchmark. That compares to about 17 times at the start of the year. It could get down to 13 times, says Morgan Stanley.

Analysts bullish on Chinese stocks heading into the tumult are now assessing the damage. In March, before the latest crackdown, the average consensus 12-month share price target for stocks in the MSCI China Index was about 40% higher than a year earlier.

The majority of analysts rate giants Alibaba Group Holdings and Tencent Holdings at least a "buy," according to Refinitiv data, while most recommend a "hold" or "buy" for New Oriental Education & Technology Group, whose stock has tumbled close to 90% this year.

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