What happened
Several Chinese stocks fell today as rising COVID-19 cases in the country concerned investors about more lockdowns and restrictive policies that have damaged the Chinese economy all year.
Shares of the Chinese electric car maker Nio (NIO 2.30%) traded roughly 3.7% lower as of 10:51 a.m. ET today. Meanwhile, shares of the digital freight platform Full Truck Alliance (YMM 1.32%) traded nearly 8.4% down and shares of the fintech company Lufax Holding (LU 2.64%) had plummeted roughly 22.5%.
So what
Chinese stocks have been on the rise lately after the Chinese government rolled out a pretty comprehensive plan to aid the struggling real estate market in China, which contributes a lot to the overall economy. Investors also seem to think that Chinese President Xi Jinping and his administration have turned a corner when it comes to regulatory policy toward Chinese tech stocks.
Image source: Getty Images.
There have also been indications that the government may soon lift some of the more restrictive "zero-COVID" policies that have dogged the Chinese economy all year. But COVID cases in the country have been on the rise and China reported more than 32,000 cases yesterday. Residents are now being encouraged to stay at home and there've also been some reports of temporary lockdowns in Beijing. This raises the question of when China will actually be in the clear to fully open its economy.
Mark Haefele, the chief investment officer of UBS Global Wealth Management, said in a recent research report that "a meaningful reopening, which we define as a permanent end to snap lockdowns and other domestic mobility curbs, is most likely to take place" in the third quarter of 2023, implying that there could still be a ways to go.
In other news, analysts at J.P. Morgan lowered their rating on Lufax to underperform after the company missed earnings estimates earlier this week and significantly lowered its full-year guidance for 2022. The company now expects loan originations for the full year to be down as much as 24% compared to 2021. Net profit is expected to be down as much as 49% year over year.
J.P. Morgan cut its earnings estimates for Lufax by 32%, largely due to the Q3 results. However, the analysts noted the company could rebound if macro conditions in China improve faster than expected and if the company returns more capital to shareholders than currently expected.
Now what
COVID-19 is going to be an ongoing concern in China and while the government has indicated that it may let up on its restrictive "zero-COVID" policies, there is no indication that it plans to abandon them entirely, leaving the economy and many Chinese stocks vulnerable if cases continue to rise.
Long-term, I do expect the country to get past this as many other parts of the world have. I think Nio is going to do well over time because of the rapid adoption of electric vehicles in the country. I also really like Full Truck Alliance's concept, but think it could be more volatile because it is still only a mid-cap stock. Lufax has opportunities as well, but I'm not really interested in adding exposure to the Chinese consumer at this time.
If you do consider purchasing Chinese stocks, make sure to do plenty of due diligence on the regulatory landscape around that stock because this is a big theme for the entire sector and can't be ignored.
