"The bubble is bursting," Dong Baozhen, a Beijing-based hedge fund manager said, referring to the sharp sell-off in tech and consumer stocks. The spectre of inflation and tighter credit is a "killer" of high-flying stocks, he said.
Instead, there are signs of money seeking shelter in banking - once shunned for fear of virus-related bad loan exposure - and unfashionable small-cap stocks, as well sectors poised to benefit the most from economic recovery, such as energy. Amid bloodshed in tech, financial stocks have been relatively firm while an index tracking small firms has barely budged.
Growth-oriented stocks have suffered globally in recent weeks from rising concerns over inflation. In China, additionally, fears that authorities are keen to reduce generous, pandemic-era stimulus has led to near-panic selling of such stocks.
At the annual meeting of China's National People's Congress this month, authorities set an economic growth target of above 6% for the year, underwhelming market expectations.
The goal is conservative, as if "creating room for policymakers to take action to contain risks of asset bubble in both equity and property," Citi Private Bank analysts said in a client note on Monday.
In addition, comments from top banking regulator Guo Shuqing against asset bubbles last week also sent a hawkish message reminding markets that China is the world's most-expensive market for non-financial equities.
Even after the recent sell-off, Moutai's price is 55 times trailing earnings, while Tencent trades at 45 times.
The combination of high valuation and the government's policy tendency "could be very meaningful for Chinese equities because policies still heavily influence the market," Citi said, forecasting another 10% drop in China's benchmark CSI300. The index hit record high on Feb. 18 and has lost 14% since.
Michelle Leung, chief executive of China-focused asset manager Xingtai Capital, said the bubble in China's big-cap tech and consumer staples was partly fuelled by global investors' rush to increase exposure to China as it recovered from the COVID-19 pandemic.
"If you're trying to buy China quickly, the easiest thing to do is to buy an exchange-traded fund, an index fund or a big-cap consensus name," and that has caused crowding in Moutai, Alibaba, Tencent and the like, she said.
Many consensus names are still valued at 60 times their earnings or greater, which "doesn't quite make sense at this point," said Leung, a value-driven, bottom-up investor.
Leung's half-a-billion-dollar long-only China fund has outperformed the MSCI China Index by around 20% annually over the past three years, vindicating a strategy of "buying hidden gems" when most investors are chasing momentum.
Her portfolios include electric scooter producer Yadea Group Holdings Ltd and property management firm A Living Smart City Services Co Ltd, bought at price-earnings ratios of 8 and 11 times respectively.
Brian Bandsma, a New York-based portfolio manager for Vontobel's Quality Growth Boutique, said he is shifting to defensive stocks because companies such as Meituan and Nio Inc showed clear over-valuation, even placing them in bubble territory.
Liam Zhou, founder of Shanghai-based Minority Asset Management, recommended buying Chinese banking stocks, citing the sector's low valuation and reduced risks due to the government's deleveraging campaign.
Chinese banks are perennial laggards but have rebounded to a three-year high in recent weeks, and the sector still trades at a 30% discount on average to their net assets.
(Reporting by Samuel Shen and Andrew Galbraith; Editing by Vidya Ranganathan and Christopher Cushing) ((email@example.com; +86 21 20830018; Reuters Messaging: firstname.lastname@example.org))