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China's Equities Soar High: A Sustainable Rally or a Short-Lived Spike?

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Robert Tavares

May 6, 2024 - 23:19 pm

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China's Surging Stocks Outpace S&P 500: Analysts Weigh in on Sustainability and Investment Strategies

After enduring a prolonged downturn in recent years, where the Chinese markets saw a loss of nearly $5 trillion over three years, investors are now witnessing a strong rally in China's stocks, outperforming even the stalwart S&P 500 in a surprising rebound. So far, this year has been remarkable for Chinese equities, with the MSCI China index making significant leaps. The index, which encompasses the main A-shares from the mainland, shares listed in Hong Kong, and U.S.-listed Chinese companies, has experienced a rise of roughly 9%. Additionally, the KraneShares CSI China Internet ETF has climbed by an impressive 13%, while the S&P 500 has advanced by approximately 8% during the same period. This resurgence has emerged after enduring a persistent and deep decline, attributed to a concoction of headwinds such as a property debt crisis, and decelerating growth among other debilitating factors. The burning question that now plagues investors and analysts is: Can this Chinese market rally sustain its momentum, or is it high time to lock in profits?

Wall Street's Perspective on the China Market Rebound

Leading financial analysts from acclaimed institutions have been closely monitoring this upswing in the Chinese stock markets. Bernstein analysts, in a note dated May 3, expressed that the Chinese market has enjoyed one of the most understated bull cycles, with the MSCI China index up 19% since its January trough—that’s despite the prevailing skepticism among investors. The analysts remain optimistic, suggesting there might still be "more room" for the China rebound to flourish, particularly in growth stocks. Nonetheless, they also underscored the critical need for strategic hedging through momentum. Such a momentum-driven investment strategy involves purchasing shares that exhibit a rising trajectory but selling them upon indications that they've peaked.

Further reinforcing this sentiment, in another note on May 3, BNP Paribas articulated its decision to raise the MSCI China target to a "bullish scenario," indicative of yet another potential upswing ranging from 10% to 15%. This prognostication draws upon China's Politburo's April statement exemplifying a more assertive commitment to policies fostering growth and reforms.

JPMorgan, in its May 3 dispatch, pointed to a more widespread recovery becoming likely, which should play to the strengths of proficient leaders across sectors still to participate or yet to fully capitalize in the ongoing rally. They anticipate that a segment of property buyers, those with an appetite to upscale, will bolster this sector until at least the years 2026 to 2027.

Goldman Sachs also chimed in with its analysis on April 23 that Chinese A-shares could surge around 20% if China can "narrow the gap" with the international benchmark in areas like shareholder returns, corporate governance standards, and ownership by institutional investors. The renowned investment bank also observed a policy pivot by the Asian powerhouse towards 2024, with an emphasis now being placed on the high-quality development of its equity markets.

Fiscal Stimulus Measures as Catalysts

The vitality of direct and well-targeted fiscal stimulus measures, particularly those that stimulate the demand side, was underscored by Kevin Liu of CICC Research in a conversation with CNBC the previous week. These measures could be instrumental in sustaining the forward momentum of the rally. Nonetheless, there are risk factors to be taken into account, such as the timing and expediency of policy rollouts, in addition to the pace at which the economy, property sector, and corporate earnings can recuperate. Despite these concerns, Nomura's May 5 report conveyed a positive disposition towards the stock market, following the Politburo's constructive stance on stock-supportive reforms. Nomura's analysts suggest that investors, who currently hold underweight positions in Chinese stocks, might now feel compelled to ride the wave of the rally, potentially favoring cyclic recovery stocks to perform strongly.

Stock Selection: The Key to Navigating the Chinese Market

Though the overarching sentiment is bullish regarding Chinese stocks, caution and selectivity remain the watchwords when it comes to stock-picking. Goldman Sachs curated a list of what it delineated as "large-cap stable growers." These are companies with high historical earnings growth rates, low volatility in realized earnings growth, robust balance sheets—exemplified by low net-debt-to-equity ratios—and a consistent history of returning capital to shareholders.

The prominent names that met these stringent criteria, all with market capitalizations exceeding $10 billion, include BYD, SAIC Motor, Changan Automobile, Longi Green Energy, and Anhui Conch Cement. JPMorgan identified 14 stock picks rooted in various salient themes, ranging from "high yielders" like utilities to growth-oriented sectors such as artificial intelligence and electric vehicle batteries. Stocks poised to benefit from a revival in housing transactions, diversifying economic activities (advertising and trucking), and consumer spending (liquor, smartphones) were also flagged. Amongst the promising bunch, JPMorgan earmarked stocks like Kweichow Moutai, CATL, Kuaishou Technology, Ping An Insurance, China Merchants Bank, and JD.com as assertively positioned to play catch-up to the market. Pinpointing the potential, JPMorgan projected an impressive potential upside for Ping An Insurance's price target to 77 Hong Kong dollars ($9.85)—translating to an upside of 102.6% as of May 3.

Exchange-Traded Funds: A Viable Route for International Investors

For U.S. investors and others seeking exposure to the thriving Chinese market through exchange-traded funds (ETFs), there are several rated by Morningstar as bronze to gold quality, with overall fund ratings varying between three to five stars. These include, but are not limited to, the SPDR S&P China ETF, iShares MSCI China A ETF, Global X MSCI China Consumer Disc ETF, and iShares MSCI Hong Kong ETF. These ETFs offer different angles of penetration into the Chinese market—one that is currently riding a remarkable wave of optimism, inciting both eagerness and apprehension among global investors.

For more in-depth insights and the most up-to-date developments on China's stock market dynamics, interested readers can turn to the detailed analyses provided by CNBC's Michael Bloom in his original report.

Related CNBC Article

Conclusion

China's stock market is at a juncture that has captured the attention of the investing world. The crucial variables that are likely to influence the market's direction going forward are clear—China’s economic policies, investor sentiment, global economic trends, and internal market dynamics. Analysts, while generally positive, call for a nuanced approach to investing in Chinese equities, emphasizing the importance of policy watchfulness and judicious stock selection. The evolving narrative of China's stock market presents a compelling chapter in the broader story of the global economy, with investors keenly eyeing the next twist or turn in this financial saga.