China’s stock market has stalled. The domestic CSI 300 Index, for example, has barely gained at all this year, even as equity indices elsewhere have generally continued to rally. If – as economists at Capital Economics expect – China’s export growth slows further, its stock market is likely to continue to struggle.
Slowing exports and domestic demand continue to weigh on corporate earnings
“May trade data for China showed a significant slowdown in the growth of China’s exports. And we expect it to continue to do so over the coming months as the virus recedes, and work and consumption patterns return more towards normal. One consequence of this is that the earnings growth of listed Chinese companies may slow as well, in turn limiting gains in China’s stock market.”
“We doubt there is much scope for domestic earnings growth to offset slowing foreign earnings. GDP is now above its pre-pandemic trend. And authorities in China have transitioned from shoring up near-term growth to focussing on longer-term economic objectives. This has resulted in, among other things, tighter credit conditions. As a result, we have already seen economic growth there begin to slow, and we suspect it will continue to do so for some time.”
“We doubt there is much scope for the valuation of China’s stock market to offset slowing earnings growth either. While measures of valuation there have declined a bit from their late-2020 highs, they remain elevated compared with most of their history and with the valuations of many other stock markets. And we think long-term Treasury yields are likely to rise again, putting downward pressure on the valuations of global stock markets this year, including in China.”
“All of this adds up, in our view, to the CSI 300 making only a small gain between now and the end of 2021. That said, this would still be a better outcome than the slight drop that we now forecast for the S&P 500 during this period.”
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