The world-leading rally in Chinese stocks is failing to convince many global fund managers and strategists.
Invesco Ltd., JPMorgan Asset Management, HSBC Global Private Banking and Wealth and Nomura Holdings Inc. are among those viewing the recent recovery with skepticism and waiting for Beijing to back up its stimulus promises with real money. Some also fear that many stocks are already reaching overvalued levels.
Chinese stocks have soared since then End of September As a flurry of economic, financial and market support measures boosted investor confidence. The Hang Seng China Enterprises Index, which includes Chinese stocks listed in Hong Kong, rose more than 30% last month, making it the best performer among more than 90 global stock indicators tracked by Bloomberg.
“In the short term, sentiment could overshoot, but people will return to fundamentals,” said Raymond Ma, Invesco’s chief investment officer for Hong Kong and mainland China. “Because of this rally, some stocks are really overvalued” and lack a clear value proposition based on their likely earnings performance, he said.
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Stimulus measures announced by Beijing include interest rate cuts, the release of cash from banks, billions of dollars in liquidity support for stocks and a promise to end the long-term decline in property prices. While there is plenty of optimism that could underlie a sustained stock rally, there has also been a series of them false dawn before, most recently a rally in February that completely weakened.
The upswing in the past two weeks has caused Chinese stocks to reassert their influence against broader emerging market indicators and hurt the performance of fund managers who had held underweight positions in the developing country’s largest economy. The durability of the recovery will not only be important for the year-end performance of index funds, but will also have a direct impact on countries that have trade and investment ties with China.
Ma at Invesco, one of the relatively few China bulls He said he was in no rush to increase his investments earlier this year.
“There is a group of stocks whose share prices are up 30% to 40% and are near historic highs,” he said. “Whether the fundamentals will be as good in the next 12 months as they were before their peak is more uncertain to me. That would be the category we would like to cut.”
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More needed
JPMorgan Asset Management is equally cautious.
“Additional policy steps would be needed to boost economic activity and confidence,” said Tai Hui, chief Asia-Pacific market strategist in Hong Kong. “The measures announced so far can help smooth the process of debt reduction, but the balance sheet restructuring would still have to take place.”
Hui also pointed to global uncertainties that could slow the nascent stock rally.
“With the U.S. election just a month away, many investors would argue that the U.S. view of China as an economic and geopolitical rival is a bipartisan consensus,” he said. In addition, “foreign investors may be waiting for economic data to bottom and for these new policies to become more concrete,” he said.
Slowed growth
HSBC Global Private Banking remains concerned that measures taken by China will not be enough to reverse the country’s slowing long-term growth prospects.
“To sustain the recovery momentum and boost growth and achieve the 5% GDP growth target by 2024, even more significant fiscal easing is needed,” said Cheuk Wan Fan, chief investment officer for Asia at the private bank in Hong Kong. “For now, we remain neutral on mainland China and Hong Kong stocks as we expect China’s GDP growth to slow from 4.9% in 2024 to 4.5% in 2025.”
“Move on”
Still, some remain optimistic, saying valuations are low due to the three-year selloff.
“The rally can continue, there is still a lot of money that needs to be rebalanced. particularly from global investors,” Matthew Quaife, global head of multi-asset investment management at Fidelity International in Hong Kong, said on Bloomberg Television.
“We know that valuations are still below the median and could rise further from a technical perspective. This could have more legs and how much it feeds into returns is a bigger question,” he said.
Potential bankruptcy
Nomura Holdings Inc. is among the most pessimistic companies, warning that the rally could quickly reverse Boom to bust.
In the direst scenario, “a stock market mania would be followed by a crash similar to what happened in 2015,” Nomura economists led by Ting Lu in Hong Kong wrote in a note to clients. That outcome could have a “much higher probability” than more optimistic scenarios, they said.
Bond “Challenges”
Some investors and strategists are also worried about what the stimulus packages mean for the country’s bonds and currency.
China’s bonds have fallen since the stock rally began, at least temporarily ending a period in which yields hit multiple record lows as investors bought safe-haven assets.
“There are still major challenges to be resolved and it is not an easy path,” said Lynn Song, chief Greater China economist at ING Bank in Hong Kong. “We need to ensure that this political blitz effectively stabilizes the housing market’s downward trend and doesn’t just lead to a flow of hot money into stocks.”
Bonds could become a beneficiary if the stock market cools, Song said. “There is certainly a risk that we will return to the environment of previous months if something goes wrong in the next steps.”
Yuan traders on Tuesday will be paying attention to the central bank’s daily reference rate, the level around which the currency is allowed to trade. The onshore yuan has risen more than 1% over the past month and is approaching the key level of 7 per dollar. A break of this barrier could trigger another rally.