(Bloomberg) -- Investors in Chinese stocks are losing patience as a long-awaited earnings recovery fails to come through and a rally unravels.

Earnings estimates on key Chinese gauges have been slashed by the most in Asia this year as a deepening housing slump and sluggish retail sales hurt confidence. Stocks have lost momentum following a mid-May peak, with the MSCI China Index down more than 8%. 

“We’ve now seen 11 straight quarters of earnings misses for MSCI China and the analyst consensus hasn’t really gotten to grips with just how weak the underlying growth environment is in China,” Jonathan Garner, chief Asia equity strategist for Morgan Stanley, said Thursday. “You have to be selective to be involved in China. There’s also more competition going on, particularly in sectors like e-commerce.” 

Optimism that corporate performance will improve has been central to a months-long bull run earlier this year, with global funds tip-toeing back into the world’s second-biggest stock market. The recent slide is bringing back grim memories of the past years, when rebounds were soon out-shadowed by selloffs as risks from geopolitical tensions to regulatory crackdowns resurfaced. 

The Shanghai Composite Index and the CSI 300 Index have each seen their consensus earnings estimates drop by more than 6% this year, compared to an increase of 1.6% for MSCI’s Asia gauge and even higher raises for benchmarks in India and Japan, according to data compiled by Bloomberg. 

Earnings results for the members of the MSCI China Index missed the aggregate estimate by about 3.5% in the first three months of the year, while those for onshore stocks displayed a similar trend, another set of data showed. 

As the recovery falters, foreigners are back to selling. Overseas investors sold onshore stocks for nine straight days through Thursday, unloading the equivalent of more than $5 billion in the longest stretch of withdrawal since August 2023. 

Investors are reverting to “a wait-and-watch approach as allocations dip into underweight territory again,” according to the latest Asia fund managers survey by Bank of America Corp. “The frustration of having been whipsawed one time too many has molded into a structural bearishness toward the asset class,” strategists including Ritesh Samadhiya wrote in a June 18 report. 

The survey showed money mangers are net 6% underweight Chinese stocks, down from a neutral position in May. 

While Chinese investors are used to the market’s vagaries, some have been betting this time would be different as Beijing unleashed a swathe of market-supportive policies, including a property rescue package. That support, along with earnings recovery hopes, helped draw rare buy calls from strategists at UBS Group AG and Societe Generale SA, and prompted a U-turn from once-bearish money managers including veteran Mark Mobius. 

As the slide extends, with the CSI 300 down for a fifth week, doubts are creeping back in. Adding to worries is weak data. China’s home prices fell at a faster pace in May, and the country’s biggest internet firms are resorting to massive discounts to lure customers during the “618” shopping festival.

In its portfolio update at the end of May, T. Rowe Price turned overweight on emerging market equities excluding China but kept the nation as underweight, saying the stimulus so far is too incremental to reflate the market. 

Optimists are pinning their hopes on the third plenum in July, one of the country’s most important political events, where top leaders outline long-term economic objectives and telegraph policy shifts. The MSCI China Index “will trade better heading into July and August,” Wendy Liu, an equity strategist for JPMorgan Chase & Co, wrote this week. She cited the third plenum and continued buybacks as among the reasons.  

The risk is that if the third plenum’s outcome disappoints, the dominant view over Chinese stocks may turn decisively downbeat amid a lack of catalysts. 

What analysts expect to be delivered in terms of earnings over the next two years “can only be a miracle,” CLSA’s Chief Equity Strategist Alexander Redman said in a media briefing in Jakarta earlier this month. Investors should maintain benchmark weight on Chinese stocks as their consensus earnings estimates seem too optimistic, he added. 

--With assistance from Ivy Chok, John Cheng and April Ma.

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