After JPMorgan’s bearish report, Bloomberg turns more on China

After their bearish report on the industry caused a market selloff and a bout of internal hand-wringing at the biggest US bank, Bloomberg has been turning more positive on Chinese Internet stocks.

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Analysts raised their ratings on companies including Tencent Holdings Ltd. and Alibaba Group Holding Ltd. on Monday, a move that is likely to cause Wall Street to raise eyebrows after reports from the team in mid-March called the sector uninvestable. People familiar with the matter said earlier this month that the word was supposed to be removed from the March reports before publication, but slipped through in several cases because of an editorial error. A Chinese technology company reduced JPMorgan's underwriting role on an initial public offering because of the evocative label that erased $200 billion from U.S. and Asian markets.

Read more: JPMorgan s uninvestable call on China was published in Error.

Monday s upgrades mark the latest twist in a drama that has highlighted the hard balancing act facing banks as they try to expand their businesses in China while still giving clients access to candid research on the country's turbulent markets. Internet stocks have been volatile recently due to investors' concerns about China's clampdowns on the industry and the impact of strict Covid Zero lockdowns in cities like Shanghai.

The uncertainty facing the sector should begin to abate on the back of recent regulatory announcements, Yao and his colleagues wrote in their May 16 note. The shares of Meituan, NetEase Inc. and Pinduoduo Inc. were also upgraded to overweight from underweight.

Yao's team said in March that its bearish view 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. They added that risk appetite could be low and it may be hard for speculative growth names to outperform.

The Nasdaq Golden Dragon China Index hit its closing low for the year on the day of JPMorgan's March report and rallied more than 50%. It has given up some of the gains because of concerns about regulatory risks and Federal Reserve interest-rate hikes.

The JPMorgan analysts wrote that policy developments have been supportive since mid-March, including diminishing risks related to regulation, the possible delisting of American depositary receipts and geopolitics. They said a March 16 meeting led by China's Vice Premier Liu He was where authorities pledged to relax their clampdown on the tech sector, as one of the key triggers behind the change in view.

The analysts believe that there will be significant downside risk to consensus earnings for some stocks including Meituan and Alibaba in the second quarter, as Covid containment measures take a toll on Chinese businesses.

Investors are concerned about the impact of China's lockdowns, with the latest data showing significant damage to the broader economy.

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