(Bloomberg) -- China’s weakening earnings are dashing hopes for a stock market rebound, with some investors bracing for more pain as the economic slump looks set to continue.
Profit delivery for the third quarter worsened. Some 30% of the MSCI China Index members reported earnings that fell short of consensus forecasts compared to 18% in the second quarter, according to Morgan Stanley. Bloomberg Intelligence data also showed that aggregate earnings per share for these companies fell 6% from a year earlier, marking a fourth straight quarter of declines.
The delay in an earnings turnaround underscores the challenges faced by companies despite Beijing’s efforts to boost growth. A worsening property crisis, dim income prospects and regulatory uncertainties continue to pressure businesses. The dire corporate performance suggests any stock market upswing spurred by government measures will be short-lived unless there are fundamental improvements in demand.
“Third-quarter earnings results didn’t pan out to be the positive catalyst that investors might have hoped to see to reinvigorate animal spirits,” said David Chao, a strategist at Invesco Asset Management. “Heading into the final few weeks of the year, it’s apparent to me that more policy support is needed to nudge the economy back on track.”
While Internet companies were a rare bright spot, earnings growth in the sector slowed to less than half the pace seen in the previous quarter, Bloomberg Intelligence data showed. The softness in tech contributed to a broad drop in the ratio of net positive earnings surprise for MSCI China Index members, which fell to 3.7% from second-quarter’s 8.1%, according to the data.
For some tech giants, share reactions were muted even after earnings were in line with — or better than — estimates, as investors focused on an uncertain outlook. Meituan tumbled on weaker guidance while Tencent Holdings Ltd.’s profit beat failed to boost its shares much.
The downward momentum to earnings revisions will likely “continue through year-end and into the first quarter of 2024,” Morgan Stanley analysts including Laura Wang wrote in a note dated Nov. 30. They remain “relatively cautious” on China given that further cuts to consensus earnings estimates are on the cards.
The weak earnings momentum may give investors more reasons to sell Chinese equities after the CSI 300 benchmark for mainland shares tumbled to its lowest since 2019 this week. Deep-rooted woes including geopolitical tensions and a housing market slump are seen as impediments to a recovery.
Adding to the market pessimism, Moody’s Investors Service on Tuesday cut its outlook for Chinese sovereign bonds to negative from stable, citing the nation’s usage of fiscal stimulus to support local governments and its spiraling property downturn as major risks.
While some investors see opportunities on cheap valuation, with Jefferies Financial Group Inc. last week turning “tactically positive on China,” stocks have continued to plumb new lows.
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Market watchers are now turning to the upcoming Central Economic Work Conference, where key economic agendas for next year will be hatched out, for clues on how much more fiscal and monetary powder Beijing is willing to add.
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With the broader economy yet to gain traction, some sectors “will need deflationary pressures to end to improve pricing power and help lift margins and earnings,” said Marvin Chen, a strategist with Bloomberg Intelligence.
(Updates with Moody’s action in ninth paragraph.)
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