(Bloomberg) — The global rally in Chinese stocks is not convincing many global fund managers and strategists.
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Invesco Ltd., JPMorgan Asset Management, HSBC Global Private Banking and Wealth and Nomura Holdings Inc. include those who view the recent rebound with skepticism and wait for Beijing to deliver on its stimulus promises with real money. Some are also concerned that many stocks are already reaching overvalued levels.
Chinese shares have soared since late September as a barrage of economic, financial and market support measures revived investor confidence. The Hang Seng China Enterprises Index, which consists of Chinese stocks listed in Hong Kong, has risen more than 30% in the past month, making it the best-performing index among the more than 90 global stock gauges that Bloomberg tracks.
“Sentiment could overshoot in the short term, but people will return to fundamentals,” said Raymond Ma, Invesco’s chief investment officer for Hong Kong and mainland China. “This rally has left some stocks really overvalued” and missing a clear value proposition based on their likely earnings performance, he said.
The stimulus announced by Beijing included interest rate cuts, freeing up cash in banks, billions of dollars in liquidity support for stocks and a promise to end the long-term decline in real estate prices. While there is plenty of optimism that could underlie a sustainable stock rally, there have been a number of false mornings, most recently a rally in February that came to a complete halt.
The surge over the past two weeks has seen Chinese stocks reaffirm their influence on broader emerging market indicators and hurt the performance of fund managers who had underweight positions in the economies of the largest developing countries. The sustainability of the recovery will not only be important for the year-end performance of index funds, but will also have direct implications for countries with trade and investment ties with China.
Ma at Invesco, one of relatively few Chinese bulls to hit the market this year, said he is in no rush to expand his investments now.
“There is a group of stocks whose share prices are up 30% to 40% and are almost at historic highs,” he said. “Whether the fundamentals will be as good over the next twelve months as they were before their peak is more uncertain for me. That is the category we would like to shorten.”
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JPMorgan Asset Management is equally cautious.
“Additional policy steps would be needed to boost economic activity and confidence,” said Tai Hui, chief market strategist for the Asia-Pacific region in Hong Kong. “The policies announced so far can help ease the deleveraging process, but balance sheet repair should still take place.”
Hui also pointed to global uncertainties that could hinder the emerging stock market rally.
“With the US election just a month away, many investors would argue that the US view of China as an economic and geopolitical rival is a bipartisan consensus,” he said. Moreover, “foreign investors may choose to wait until economic data bottoms out and these new policies harden,” he said.
Slowing growth
HSBC Global Private Banking remains concerned that the steps China has taken are not enough to reverse the country’s slowing longer-term growth prospects.
“More significant fiscal easing is still needed to maintain recovery momentum and support growth to achieve the 5% GDP growth target for 2024,” 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 equities, based on our expectation that China’s GDP growth will slow from 4.9% in 2024 to 4.5% in 2025.”
‘Go further’
Still, some remain optimistic, saying valuations are cheap because of the three-year sell-off.
“The rally can continue, there is a lot of money that still needs to be balanced. especially 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 average and could technically increase further. This could have more potential and how much this goes to the bottom line is a bigger question,” he said.
Potential failure
Nomura Holdings Inc. is among the most pessimistic companies, warning that the rally could quickly turn from a boom to a downturn.
In the bleakest 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 wary about what the stimulus blitz means for the country’s bonds and currency.
Chinese government bonds have fallen since the stock rally began, at least temporarily ending a period when yields hit successive record lows as investors bought safe assets.
“There are still major challenges to be solved, and it is not an easy path,” said Lynn Song, chief economist for Greater China at ING Bank in Hong Kong. “We must ensure that this policy blitz is effective in stabilizing the downward trajectory of the housing market and does not simply result in a flow of hot money into stocks.”
Bonds could benefit if the stock market cools, Song said. “There is certainly a risk that we could return to the situation of the previous months if something goes wrong in the next steps.”
Yuan traders will be on the lookout for the central bank’s daily reference rate on Tuesday, the level around which the currency is allowed to trade. The onshore yuan has risen more than 1% in the past month and is nearing the key level of 7 per dollar. If this barrier is broken, it could trigger a further rally.
What to watch
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China releases foreign exchange reserves data for September
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A range of countries publish inflation data, including Thailand, Brazil, Mexico, Chile and Argentina
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Central banks in India, Peru and South Korea announce interest rate decisions
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Mexico and India publish industrial production data
–With help from Shulun Huang and Carolina Wilson.
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