JPMorgan analysts behind ‘uninvestable’ call upgrade China tech

Investor concerns over the impact of China’s lockdowns remain high, with the latest data showing significant damage to the broader economy.
Image: Bloomberg

JPMorgan Chase & Co. analysts are turning more positive on Chinese Internet stocks, upgrading at least 15 companies just two months after their bearish report on the industry triggered a market selloff and a bout of internal hand-wringing at the biggest US bank.

Analysts led by Alex Yao raised their ratings on companies including Tencent Holdings and Alibaba Group Holding on Monday, a move that’s likely to raise eyebrows on Wall Street after reports from the team in mid-March called the sector “uninvestable.”

That word was supposed to be removed from the March reports before publication, but slipped through in several cases because of an editorial error, people familiar with the matter said earlier this month. The evocative label helped erase about $200 billion from US and Asian markets and prompted one Chinese technology company to downgrade JPMorgan’s underwriting role on an initial public offering.

Monday’s upgrades mark the latest twist in a drama that has highlighted the tough balancing act facing banks as they try to expand their businesses in China while still giving clients access to candid research on the country’s turbulent markets. Internet stocks have been particularly volatile of late as investors weigh the severity of China’s clampdowns on the industry and the impact of strict Covid Zero lockdowns in cities like Shanghai.

“Significant uncertainties facing the sector should begin to abate on the back of recent regulatory announcements,” Yao and his colleagues wrote in their May 16 note. Shares of Meituan, NetEase Inc. and Pinduoduo Inc. were also among those upgraded to overweight from underweight.

Yao’s team said its bearish view in March reflected the first of a three-stage-cycle. The second phase — where the selloff abates and share prices stabilise — has arrived earlier than expected, the analysts wrote. They added that risk appetite could remain low and it may be difficult for speculative growth names to outperform.

The Nasdaq Golden Dragon China Index hit its closing low for the year on the day of JPMorgan’s March report and at one point rallied more than 50%. It has since given up some of those gains amid persistent worries about regulatory risks and Federal Reserve interest-rate hikes.

Policy developments since mid-March have been supportive, diminishing risks related to regulation, the potential delisting of American depositary receipts and geopolitics, the JPMorgan analysts wrote. They mentioned a March 16 meeting led by China’s Vice Premier Liu He, where authorities vowed to ease their crackdown on the tech sector, as one of the key triggers behind the change in view.

The analysts added that they still expect “significant downside risk” to consensus earnings for the second quarter for some stocks including Meituan and Alibaba as Covid containment measures take a toll on Chinese businesses.

Investor concerns over the impact of China’s lockdowns remain high, with the latest data showing significant damage to the broader economy.

© 2022 Bloomberg

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