Remember when back on March 14, JPMorgan – easily the staunchest bull on US stocks – stunned Wall Street when its analyst Alex Yao told the truth about Chinese tech stocks, saying they were "uninvestable"? For those who have forgotten, this is what the bank said:
As risk management becomes the most important consideration for global investors in relation to their China Internet investment strategy as they price in China’s geopolitical risks and incremental concerns about regulatory risks, we find China Internet uninvestable on a 6-12 month view with an unpredictable share price outlook, depending on the market perception of China’s geopolitical risks, macro recovery and Internet regulation risk. The sector-wide sell-off might continue given lack of valuation support in the near term, in our view. We downgrade 28 coverage stocks to Neutral or Underweight. The only name with an OW rating in our coverage universe is Kuaishou.
Well, just two days later JPM was fed a horse dose of humiliation when a rally sparked by PBOC jawboning sent all these "uninvestable" stocks soaring as much as 40% (a move which we had predicted just hours earlier, when we said that the JPM downgrade "confirms the price action and if anything suggests that with the bottom having fallen out of the sector, now is the time to buy China internet stocks").
Of course, while JPMorgan was ultimately right and Chinese tech stocks did continue to crater, China decided to punish JPM and its clients, and as the PBOC's jawboning sent stocks surging days after the JPM record, all those who listened to the bank got stopped out of their short positions.
JPMorgan's humiliation was not done yet, however, and China continued to dole out punishment to Jamie Dimon's bank for daring to bash its tech stocks – something Beijing has been doing with impunity for the past two years as it seeks to teach the country's home grown start up billionaires a lesson – and back in April, Bloomberg reported that JPMorgan was removed as the most senior underwriter for Kingsoft Cloud Holdings' Hong Kong stock offering after one of the bank’s analysts cut the share-price target for the Chinese technology company by half. The bank remains a sponsor of the IPO, but is now ranked behind UBS Group AG and China International Capital Corp on the deal.
But the humiliation wasn't done, and last week an even more embarrassing moment emerged when Bloomberg reported that JPMorgan's harshly written "uninvestable" note was never meant to be published in the first place.
According to Bloomberg, "JPMorgan editorial staff in charge of vetting the bank’s research asked for “uninvestable” to be removed from 28 reports penned by technology analyst Alex Yao and his team before they were published on March 14." But while the word was cut from most of the reports – in some cases replaced with “unattractive” – it appeared in the published version of four, including one on JD.Com Inc.:
“As risk management becomes the most important consideration among global investors in relation to their China investment strategy, as they price in China’s geopolitical risks, we view China Internet as uninvestable on a six-12-month view with a binary share price outlook.”
According to Bloomberg, JPMorgan has concluded that it was an editorial error that allowed the word to slip through even though the editors, analysts and supervisors involved had all agreed before publication that it wasn’t the best choice of word. And indeed, while Yao’s team was undoubtedly turning more cautious on Chinese Internet companies, its prediction of share-price gains for at least 10 of them by year-end suggested the sector wasn’t entirely “uninvestable.”
Today, however, JPMorgan's humiliation was complete, because now that it has become all too clear just how political the bank's sellside notes are, JPM analysts miraculously turned bullish on the same Chinese Internet stocks they recently called "uninvistable", and upgrading at least 15 companies just two months after their bearish report on the industry triggered a market selloff, an even more powerful short squeeze, and a bout of internal hand-wringing at the biggest US bank.
On Monday, the same team of analysts led by Alex Yao raised their ratings on companies including Tencent and Alibaba, a move that even Bloomberg said would "raise eyebrows on Wall Street" after reports from the team in mid-March called the sector “uninvestable.”
Monday’s upgrades mark the latest twist in the closely watched drama that has highlighted the tough "balancing act" banks face as they try to expand their businesses in China while still giving clients access to candid research (i.e., factual reports instead of worthless propaganda) on the country’s turbulent markets.
“Significant uncertainties facing the sector should begin to abate on the back of recent regulatory announcements,” Yao and his colleagues wrote in their May 16 note, in which they forgot all about just how uninvestable the same sector was two shorts months ago. Shares of Meituan, NetEase and Pinduoduo were also among those upgraded to overweight from underweight.
Naturally, Yao’s team couldn't just pull a "deus ex machina" and pretend it never said its own call would be garbage just a few weeks ago, and so to cover up its tracks, the JPM analysts said their bearish view in March reflected the first of a three-stage-cycle. The second phase — where the selloff abates and share prices stabilize — has arrived earlier than expected, the analysts wrote, not that anyone would believe them of course. Still, to preserve the last shred of credibility, they added that risk appetite could remain low and it may be difficult for speculative growth names to outperform.
The JPM analysts also said that policy developments since mid-March have been supportive, diminishing risks related to regulation, the potential delisting of American depositary receipts and geopolitics, as they scrambled to come up with some way to soothe China's anger and make Beijing forget that the downgrade ever happened. They also mentioned a March 16 meeting led by China’s Vice Premier Liu He, where authorities vowed to ease their crackdown on the tech sector, as one of the key triggers behind the change in view.
The analysts cautioned that they still expect “significant downside risk” to consensus earnings for the second quarter for some stocks including Meituan and Alibaba as Covid containment measures take a toll on Chinese businesses. That did not prevent them from upgrading both companies from Sell (UW) to Buy (OW).
The Nasdaq Golden Dragon China Index hit its closing low for the year on the day of JPMorgan’s March report and just two days later point rallied more than 50% as the PBOC sparked a short squeeze to stop out all those who had shorted Chinese stocks on JPM's advice. It has since given up some of those gains amid persistent worries about regulatory risks and Federal Reserve interest-rate hikes.
And speaking of outright JPMorgan propaganda, we got the latest installment from the bank's US facing team earlier today when Marko Kolanovic, who has been horrifically wrong with his recos in 2022, telling clients to buy stocks for 20 consecutive weeks…
… decided to keep digging the hole he is in, and earlier today did what he has done very single week, saying that he "maintains a pro-risk stance" because he thinks that equity markets price in too much risk of a near-term recession (somehow he calculated this as being 70% even though if that was truly the case, the S&P would be trading around 3,000 right now) and being from JPMorgan, Kolanovic of course believes there will be no recession so you must buy stocks. Hopefully you still have some money left after having bought stocks for the past 19 weeks after listening to Marko play the same old broken record week after week after week…