EV bonanza, Chinese equities comeback, stocks to watch

Has the bleeding stopped in the Chinese equities?

Chinese equities have just experienced a drawdown of 22% measured on monthly frequency before recently gaining again as the central bank has increased liquidity provisions into the market and the government has stepped up efforts to soften the impact from the slowing housing market. The country’s zero Covid-19 case policy is also constantly driving disruptions in global supply chains and creating a stop-and-go economy. Caterpillar recently said that their best-selling construction machine would see flat revenue in China compared to 2020 indicating that building activity has significantly slowed down.

The ongoing technology regulation is also hurting growth with Tencent posting last week the lowest revenue growth since 2004. More large Chinese technology companies will report earnings this week with NetEase having already reported before the US market open. NetEase beat expectations on revenue and said that is planning an IPO of its music service Cloud Village in a sign that music is one of those areas that will be more regulated going forward.

As the long-term chart below shows, all the risks currently flaring up in China should also be compared against a long-term trend of strong returns in USD. Despite the ongoing issues we believe China will continue to deliver returns to shareholders but investors have to be more selective and get exposure to those part of the economy which are being viewed positively by the government such as clean energy technology, semiconductors, battery technology etc. The key risk remains the housing market which is a large part of the economy.

Stocks to watch today

Paradox Interactive – reports Q3 operating loss on 42% decline in revenue due to cancelled new games and low uptake on existing games, but analysts seem confident in the CEO’s ability to turn around the company in 2022.

Land Securities – good 1H results on stabilization of asset values and analysts are warming up to the property company as it seems the worst is behind now.

Vodafone – reports 3Q results in line with expectations and raises free cash flow guidance.

Europcar – boost fiscal year outlook for EBITDA to €170mn from €150nm on better-than-expected pricing. Volume is still key risk due to Covid-19 wave.

Home Depot – same-store sales up 6.1% vs est. 1.5% and Q2 revenue of $36.8bn vs est. $33.5bn showing that Americans are still upgrading and fixing their homes.

Walmart – raises fiscal year outlook following same-store sales growth excluding gasoline of 9.9% vs est. 7% although e-commerce growth is coming down as the society has opened up.

Pfizer – has agreed to produce and sell and cheaper version of its promising Covid pill for treating patients that has got hospitalized with Covid.