The trickle of positive calls on Chinese equities has turned into a flood as a recent easing of coronavirus curbs and pledges of more stimulus help revive sentiment.
The upbeat tide on the nation’s stocks has extended beyond local firms, with investors like PineBridge Investments, Man Group and Eurizon SLJ Capital all issuing positive outlooks recently. This may provide another leg up for the benchmark CSI 300 Index, which has climbed about 17% from an April low, among the best-performing gauges in the world.
Optimists are shrugging off a new wave of infections, which threatens to set off another lockdown in major cities such as Shanghai.
“Chinese equities seem well-positioned to benefit from a normalised economy and policies, and are exceptionally cheap relative to the fundamentals,” Stephen Jen, founder of Eurizon, wrote in a note. “The business cycle is supportive of a recovery and makes it an important diversification tool,” he said, adding that a 10% rise in China stocks by year-end is “entirely reasonable.”
Among the bulls, Citigroup Inc upgraded its call on China’s shares to overweight this week, citing attractive valuations and the central bank’s easing stance.
The buy-in from overseas investors sets the stage for Chinese equities to extend gains, as foreign flows were a key driver of the market’s recent outperformance.
Sentiment has been on the mend as China continues to roll back virus restrictions. In recent weeks, the authorities cut the quarantine period for inbound travellers and pledged to resume international flights. Meanwhile, Hong Kong suspended a system that banned airline routes which brought infected passengers to the city.
“The gradual reopening of Shanghai and loosening of quarantine rules suggest the worst might be over,” said Cynthia Chen, portfolio manager at PineBridge Investments, citing Covid-19 as the biggest swing factor for growth. “Economic growth trend is likely to be accelerating pretty nicely, at least in the near term.”
Chinese stocks emerged as a haven of sorts during the recent global rout as the central bank’s accommodative policy stood in contrast to the Federal Reserve’s tightening bias. The correlation between the Chinese benchmark gauge and the S&P 500 Index on a 52-week basis has turned negative for the first time since 2017.
The People’s Bank of China has maintained an easing bias to shore up an economy that’s in danger of missing the official annual growth target of around 5.5%. Officials are also said to be weighing a move to allow local governments to sell special bonds in the second half to accelerate infrastructure funding.
Still, China’s adherence to the Covid Zero policy remains a key risk. There are growing concerns about a new round of movement restrictions as virus infections remain high in Shanghai and cases flared in the eastern province of Shandong.
China’s virus strategy, a renewed lockdown and a weaker-than-expected property market recovery are among the risks confronting the market, said Louis Luo, investment director at Multi-Asset Solutions at Abrdn Plc.
For its part, Morgan Stanley thinks “a hybrid approach” which combines a targeted lockdown and suspension of services may “protect supply chains, facilitate faster reopening, posing less economic disruption,” chief China economist Robin Xing wrote in a note.
- Bumpy recovery -
Against this backdrop, some analysts are calling for caution. Credit Suisse Group AG has cut its targets for Chinese stock indexes on expectations of a “bumpier” recovery, while Thornburg Investment Management Inc. remains wary due to lingering uncertainties over the Covid Zero policy and tech regulation.
Investors are also keenly watching valuations and assessing the impact of second-quarter lockdowns after the earnings season kicked off this month.
Despite all the risks, Man Group thinks the tide is turning in favour of China.
“If we are indeed reaching a period of relative stability in China, loosening policy may begin to reverse earnings revisions momentum,” analysts including Andrew Hill wrote in a note. “Even if earnings revisions remain negative at index level, we still see a great deal of opportunity in Chinese equities.”