A surge in corporate profits in China may just be the positive catalyst global stock markets need as rising bond yields threaten to derail the rally in equities.
Having powered its way out of the coronavirus lockdown to become the only major economy in the world to grow last year, China is also seen taking the lead on earnings recovery from the pandemic. Profits at firms in the CSI 300 Index are expected to jump 28% year-on-year in the fourth quarter, the fastest pace since 2010, according to data compiled by Bloomberg. That's versus an estimated growth of just 2.2% for the S&P 500 Index.
Profit growth of the CSI 300 Index is seen to be fastest since 2010 in 4Q.
China's latest results season has assumed greater significance as it could offer clues to how the global earnings recovery is taking shape. It also comes amid the backdrop of a slump in local stocks that has seen the CSI 300 enter a technical correction in part due to concerns about lofty valuations.
"Corporate earnings in China will be a leading indicator that the global economy is getting better," said Paul Pong, managing director at Pegasus Fund Managers Ltd. "China is at least three months ahead of the other major economies like the U.S. in terms of economic recovery. By the middle of this year, we will see the U.S. recover at an accelerated pace."
While listed Chinese companies have until the end of April to report their December quarter and full-year results, the big ones usually report around the end of March.
Commonalities in the economic and market cycle suggest that, in 2021, what happens in China might not stay in China, Tom Orlik and Scott Johnson of Bloomberg Economics wrote in a recent note.
Chinese shares that were traders' hot favorites amid the pandemic last year have been hit the hardest during the latest selloff, echoing a global trend as investors rotate out of pricey names.
Liquor maker Kweichow Moutai Co., the mainland's largest stock, has plunged 22% since soaring to a record on Feb. 10. It is scheduled to report results on March 30.
"The recent selloff makes this earnings season more important -- it's a great opportunity to find quality stocks," said Andy Wong, fund manager at LW Asset Management. "We will watch closely those new-economy companies -- like new energy stocks -- to see if their businesses have met previous guidance and what management's outlook looks like."
To be sure, Pong from Pegasus warned that the ultra-loose liquidity environment which fueled the stock-market rally amid the pandemic now looks uncertain.
"China is the first out of the pandemic and it is tightening liquidity," he said. "If the rest of the world also recovers, other central banks may also control the liquidity, which will be bad for stocks."
Earlier this month, Federal Reserve Chairman Jerome Powell refrained from forcefully pushing back against the recent spike in yields, unsettling equity-market investors.
Meanwhile, analysts in China remain bullish, having continued to lift profit forecasts for CSI 300 members even amid the recent rout toward the record levels seen in early 2020 before the virus spread worldwide.
Further, the spread between sell-side analysts' forecasts and the CSI 300 index's level reached the widest since the depths of the 2015 selloff on Tuesday, when the gauge posted its lowest close this year. That said, historically, sell ratings are rare in China's stock market.
Jessica Tea, investment specialist for Greater China equities at BNP Paribas Asset Management, says that some of the stocks most impacted in the rout since February are of companies that delivered "good" earnings over the past year.
"As long as these companies keep the same operation momentum, for which we are confident, we believe that investors will refocus on the earnings quality and standout companies," she said.
Note: CSI 300 profit-growth forecast for 4Q 2020 is based on figures of 75% of index companies for which there's at least one analyst estimate in data compiled by Bloomberg.
— With assistance by Moxy Ying
Disclaimer: This article first appeared on Bloomberg, and is published by special syndication arrangement