Chinese stocks listed in Hong Kong are facing bleak milestones as a global rush into artificial intelligence supply chain players sidelines the Internet and consumer companies that dominate the offshore benchmark.
Investors are increasingly favoring chipmakers listed on the mainland and in other North Asian markets, where companies are seen as the biggest beneficiaries of surging demand for AI. Meanwhile, weak earnings growth and easing liquidity are adding pressure to offshore gauges, whose biggest constituents remain vulnerable to weak consumer demand.
A measure of Chinese shares listed in Hong Kong has fallen nearly 8% this year, ranking among the worst performers of more than 90 global equity gauges tracked by Bloomberg. The MSCI China Index is nearing a bear market, having dropped 18% from its October peak.
“The indices are measuring the wrong side of the economy,” said Hao Hong, chief investment officer at hedge fund Lotus Asset Management Ltd. “The constituents are mostly old economy stocks with little AI exposure, so nobody is paying attention to them.”
Unlike benchmarks in Taiwan and South Korea, where semiconductor firms account for at least half of index weightings, financial shares make up more than 28% of the Hang Seng China Enterprises Index, while consumer names make up nearly 23%.
Even the Internet sector that once drove enthusiasm for offshore Chinese equities is losing momentum. Companies including Alibaba Group Holding Ltd. and Tencent Holdings Ltd. reported revenue for the March quarter that fell short of estimates amid big investments in AI, fierce domestic competition and weak consumer sentiment.
Analysts have trimmed their forward earnings estimates for HSCEI members by nearly 3% from a year ago, according to data compiled by Bloomberg, while raising projections for Korea’s Kospi Index by 246% and Taiwan’s Taiex gauge by 58%.
“Concerns over higher-for-longer US interest rates due to inflation, earnings misses at some e-commerce giants due to intensifying competition, and Beijing’s ban on illegal cross-border brokerage business hit investor sentiment,” Bloomberg Intelligence analyst Sharnie Wong wrote in a note dated June 12.
Support from onshore investors is also starting to fade. Mainland Chinese investors sold a net HK$3.6 billion worth of Hong Kong-listed shares through the stock connect program in May, the first monthly outflow since June 2023, according to Bloomberg Intelligence.
Some see scope for a rebound in China’s offshore shares, citing cheaper valuations and considerations for diversification. The HSCEI now trades at about 10 times forward earnings, compared to 20 times and 17 times for benchmarks in Taiwan and Japan, respectively.
“Areas like property and consumer have really lagged, and there’s real value there,” said Dale Nicholls, a portfolio manager at Fidelity International. “The risk reward has definitely improved.”
Still, Chinese offshore stocks’ underperformance is likely to persist in the near term amid lingering regulatory concerns and a fragile economic recovery. Recent measures have revived worries over crackdowns on competition. Goldman Sachs Group Inc. downgraded H-shares this month, citing rising opportunity costs as investors find more attractive opportunities elsewhere.
“There is no group of stocks that will benefit much from the tech and AI rally,” which doesn’t bode well for the outlook of the HSCEI, said Chauwei Yak, chief executive officer at GAO Capital Pte in Singapore.
This article was generated from an automated news agency feed without modifications to text.
