Internet and automotive stocks drag down China's stock market

LootboxPhobia · 2026-02-24T18:52:59+00:00

The Chinese stock market faces pressure this year, especially with the poor performance of the internet and automotive sectors. However, other sectors such as industrials and biotechnology have seen gains. Strategists point out that the profit downgrades for internet companies are mainly due to weak consumer spending, and they predict that short-term rebounds may be difficult to sustain. It is recommended to focus on small and mid-cap stocks and consumer stocks.

LootboxPhobia

2026-02-24 18:52:59

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Investing.com - The Chinese stock market has been under pressure this year, with declines mainly concentrated in the internet and automotive sectors, while most other sectors have recorded gains.

Jefferies strategists stated in a report: “The sharp pullback in the MSCI China Index is primarily led by internet stocks,” pointing out earnings downgrades—mainly in the e-commerce sector—and a cooling of investor sentiment toward AI mega-service providers. This shift reflects trends in the U.S. market, where American investors “prefer the ‘hardware’ side of the AI revolution.”

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Despite the overall weak performance, market breadth has significantly improved. Jefferies emphasized that over 60% of MSCI China constituent stocks are outperforming the index, with the industrial, commodities, and pharmaceutical/biotech sectors being the strongest performers so far this year. Small-cap stocks have also outperformed large caps.

On the other hand, internet companies continue to face pressure, with fundamentals deteriorating. The strategists noted that earnings in this sector “largely depend on Chinese consumer spending, which has remained weak,” and intense competition among e-commerce platforms has led to significant downward revisions. They wrote that since mid-2025, earnings per share for the internet sector have been downgraded by an average of about 6% each quarter.

The automotive sector, along with internet, telecommunications, and media, remains a laggard, further dragging down the overall market performance.

Regarding valuation signals, strategists said data suggests the internet sector may be approaching a technical rebound. The Hang Seng Tech Index has lagged over 15% behind the Hang Seng China Enterprises Index (CEI), and historically, such a gap often reverts to the mean.

However, Jefferies warned that any rebound could be short-lived. The strategists stated, “A more sustainable rebound requires an improvement in earnings expectations, which has not yet occurred.” Until then, they remain optimistic about small- and mid-cap companies with earnings growth momentum and consumer stocks supported by yields.

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