On Aug 20, a relatively unknown Chinese gaming studio, Game Science, released what was widely touted as China's first domestically designed "AAA" game (a designation reserved for big-budget titles with long development periods), Black Myth: Wukong.
Loosely based on the 16th century classic Chinese novel Journey to the West, the game was released to much fanfare and critical acclaim, and the much-anticipated global release resulted in the sales of Sony's PlayStation 5 consoles skyrocketing, which led to long queues in retail stores.
The title went on to sell 10 million copies globally in three days, becoming one of the fastest-selling video games of all time. As a result, China's video gaming market value grew by more than 15% year-on-year in August, driven by the popularity of the title.
In a stroke of coincidence, almost as if the Chinese bourses felt the wrath of the Great Sage (the moniker given to the main protagonist in the novel), Chinese equities have staged a spectacular rally since, with the Shanghai Shenzhen CSI300 registering one of the best single-day gains since 2008.
STIMULUS TAKES HOLD
In reality the boost in equity prices over the past month was caused by a myriad of stimulus measures from the Chinese government, including a 50-basis-point cut in bank reserve requirements, cuts to key interest rates and central government loans to local authorities to buy up unsold real estate assets, as well as a reduction of the minimum down payment for a second home from 15% to 10%.
In addition, the People's Bank of China will provide 800 billion yuan ($113 billion) of liquidity to stabilise the equity market. A couple of days later, the Politburo followed up with further support measures, with a surprisingly sharp rhetorical shift towards fiscal policy. Clearly, this is a step in the right direction, as fiscal accommodation is the only effective way to counteract the deleveraging trends in the private sector.
In the meantime, Chinese equities have entered a cyclical bull market. The CSI 300 soared by more than 20% in only five trading days, albeit from a rather depressed starting point.
The first phase of this rally featured fierce moves, short covering and FOMO (fear of missing out) buying. That said, it was also different from previous rallies as exchange-traded funds were aggressively employed by investors to raise their China positions quickly, while stock picking has been less emphasised.
Futures and derivatives were also used, with futures positioning of the A50 index back to neutral levels and that of the Hang Seng Index in Hong Kong remaining deeply in positive territory. The number of brokerage account openings has increased multiple times, according to local Chinese news media. If true, this indicates more cash may be deployed to the A-share market.
"Buy everything China-related" was heard over the past weeks, with investors scrambling for broad exposure, rather than focusing on stock selection. This is how a China rally has often started, but such an indiscriminate approach to buying stocks has historically not lasted long.
After a bout of profit-taking, we expect the offshore market to move on to the second phase of the rally, which features slower gains, higher volatility, but with the basics of earnings and valuations back on the priority list for investors.
FOCUS ON QUALITY
Investors may reconsider their China equities exposure by shifting from those with weaker fundamentals towards quality stocks. Case in point, we believe the property market will take a longer time to recover regardless of the strength of fiscal policies, and recommend investors reduce Chinese property exposure on current strength, instead focusing on stocks with strong shareholder returns.
Looking to the West, the announcement of stimulus in China ideally complements the overall macroeconomic scenario of a soft landing for the US economy. The Federal Reserve kicked off its rate normalisation cycle with a larger-than-expected 50 basis point (bps) rate cut. We expect a series of 25bps cuts to bring the fed funds target range to between 3.25% and 3.5% by June 2025, which we view as a neutral stance.
US equities caught their breath in September in terms of time rather than price, as the S&P 500 moved largely sideways, initially selling off but rebounding towards the end of the month.
We still see no reason to question the US market's primary uptrend, which dates back to October 2022. Fed rate-cutting cycles tend to be risk-on (risk-friendly) if not followed by a recession.
Meanwhile, all eyes will be on the upcoming earnings season, where information technology (IT) and healthcare are expected to report the highest third-quarter earnings growth. We continue to advocate a barbell strategy consisting of quality growth (IT) as well as selective cyclicals, such as industrials and quality mid-caps, where we see the highest upside to current consensus earnings estimates.
Kean Tan is Head of Investment Solutions at SCB-Julius Baer Securities Co Ltd in Bangkok.