Is a strong rebound in Chinese consumption on the horizon? Morningstar names seven potential stocks to watch

According to the Zhitong Finance and Economics APP, rating agency Morningstar published the third-quarter outlook for Asian stock markets, reviewing that apart from utilities outperforming, the performance of various industries narrowed in the second quarter. Financial and telecommunication stocks showed strength during the period due to positive first-quarter performance. In addition to the above sectors, the agency is optimistic about the strong rebound of China's retail sales by 2025, and also believes that REITs and consumer defensive stocks are worth considering. They have recommended seven stocks from cyclical industries, defensive industries, and economically sensitive stocks.

Rate Cut Expectations Favor Asian Utilities, REITs, and Consumer Defensive Stocks

Morningstar expects that the second quarter and first half-year performance will lead to more divergent performance in the third quarter of Asian stocks, with weak consumer spending potentially causing some disappointments. The performance of the U.S. stock market is still dominated by NVIDIA (NVDA.US) and artificial intelligence (AI) stories, lacking broad leadership. Therefore, seeing range-bound trading in July and August before earnings season is not surprising.

Weakening inflation data and sluggish economic growth will prompt more central banks to take action, with the Fed possibly cutting rates in the second half of 2024. This may continue to support the performance of utilities, sparking interest in real estate investment trusts (REITs) and consumer defensive investments.

Asian Stocks Still Significantly Undervalued

Morningstar's outlook points out that although the Morningstar Asia Market Index has been on an upward trend, its trading price is 13% below the agency's fair value estimate.

China: Mixed performance in the second quarter, overall good performance, still with broad upside potential; Favorable policy news remains a major positive driver for the Chinese stock market, according to Morningstar.

Japanese Stocks: Optimistic about their prospects; However, after the March fiscal year results were announced, stock prices showed mixed performance, guiding a general sense of caution, with selective buying opportunities for lagging stocks.

Hong Kong A Shares Recovery Depends on 2 Major Catalysts

Considering the geopolitical situation, the agency continues to favor companies with good quality in China and focused domestically, without changing its view due to first-quarter operating data and results. Performance will be driven by the recovery of Chinese consumption and Fed rate cuts.

The latter is partly reflected in the outstanding performance of utilities so far this year, but other sectors such as REITs and consumer defensive stocks are not yet seen as driving factors.

Improvement in Chinese Consumption Depends Entirely on Real Estate

The agency believes that as housing prices stabilize and policy support begins to have a broader impact, Chinese consumption should start to show a stronger recovery by 2025, with a preference for domestically superior consumer goods companies Although the stock price has rebounded from its lows following the announcement of additional policy support, buying opportunities in cyclical consumption and real estate industries, led by Chinese companies, still exist.

For the real estate sector, institutions believe that in the short term, further upside movement would require data reflecting a bottoming out of property prices in China and Hong Kong, as well as commercial real estate demand; without these conditions, only range-bound trading is expected