China stock scepticism grows even as world-beating rally extends

Hong Kong – The world-beating rally in Chinese stocks is failing to convince many global fund managers and strategists.

Invesco, JP Morgan Asset Management, HSBC Global Private Banking and Wealth, and Nomura Holdings are among those viewing the recent rebound with scepticism and waiting for Beijing to back up its stimulus pledges with real money. Some are also concerned that many stocks are already reaching overvalued levels.

Chinese shares have skyrocketed since late September on a barrage of economic, financial and market support measures. The Hang Seng China Enterprises Index, which comprises Chinese stocks listed in Hong Kong, has jumped more than 30 per cent over the past month, making it the best performer among more than 90 global equity gauges tracked by Bloomberg.

“In the short term, sentiment could overshoot but people will go back to fundamentals,” said Mr Raymond Ma, Invesco’s chief investment officer for Hong Kong and mainland China.

Due to this rally, some stocks have become “really overvalued” and they lack a clear value proposition based on their likely earnings performance, he added.

Stimulus announced by Beijing has included interest rate cuts, freeing up of cash at banks, billions of dollars of liquidity support for stocks and a vow to end the long-term slide in property prices.

While there is plenty of optimism that could underpin a sustainable equity rally, there have been a number of false dawns before, most recently a rally in February that completely unwound.

The surge in the past two weeks has seen Chinese equities reassert their influence over broader emerging market gauges, and dented the performance of fund managers who had been running underweight positions in the biggest developing nation economy.

The durability of the rebound will matter not only for the year-end performance of index-tracking funds, but also have direct implications for countries that have trading and investment links with China.

Mr Ma, who was one of the relatively few China bulls coming into 2024, said he is in no rush to add to his investments now.

“There are a group of stocks whose share prices are up by 30 per cent to 40 per cent and almost at historical highs,” he said. “Whether in the next 12 months the fundamentals will be as good as before their peak, that’s more uncertain to me. That would be the category we would like to trim.”

JP Morgan Asset Management is just as cautious.

“Additional policy steps would be needed to boost economic activity and confidence,” said Mr Tai Hui, its Asia-Pacific chief market strategist in Hong Kong.

“The policies announced so far can help to smoothen out the deleveraging process, but the balance sheet repairing would still need to take place.”

Mr Hui also pointed to global uncertainties that may crimp the nascent stock rally.

“With the US elections only 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.

“Foreign investors may choose to wait for economic data to bottom out and for this new policy direct to solidify,” he added.

HSBC Global Private Banking remains concerned that the steps China has taken are not enough to reverse the nation’s slowing long-term growth outlook.

“More significant fiscal easing is still needed to sustain the recovery momentum and shore up growth to achieve the 5 per cent 2024 gross domestic product (GDP) growth target,” said Ms Fan Cheuk Wan, chief investment officer for Asia at the private bank in Hong Kong.

“For now, we stay neutral on mainland China and Hong Kong equities based on our expectation of China’s GDP growth decelerating from 4.9 per cent in 2024 to 4.5 per cent in 2025.”

Still, some remain bullish, saying valuations are cheap due to the three-year sell-off.

“The rally can run; there’s a lot of money that still needs to rebalance, especially from global investors,” Mr Matthew Quaife, global head of multi-asset investment management at Fidelity International in Hong Kong, said on Bloomberg Television.

“We know valuations are still below mean and could run further from a technical view. This could have more legs and how much it goes into earnings is a bigger question,” he said.

Nomura Holdings is among the most pessimistic, warning that the rally may quickly turn from boom to bust.

In the most gloomy scenario, “a stock market mania would be followed by a crash, similar to what happened in 2015”, Nomura economists wrote in a note to clients. This outcome may 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 nation’s bonds and currency.

China’s bonds have dropped since the stock rally started, ending at least temporarily a period in which yields set successive record lows as investors bought haven assets.

“There are still major challenges to be resolved, and it’s not an easy road,” said Mr Lynn Song, chief economist for Greater China at ING Bank in Hong Kong. “We need to ensure that this policy blitz is effective in stabilising the downward trajectory of the housing market and not just result in a rush of hot money to equities.”

Bonds may become a beneficiary if the stock market cools, he said. “There’s certainly a risk we could revert to the previous months’ environment if anything goes wrong in the next steps ahead.”

Renminbi traders will be watching out on Oct 8 for the central bank’s daily reference rate, the level around which the currency is allowed to trade.

The onshore renminbi has strengthened more than 1 per cent in the past month to approach the key level of seven per dollar. A break of that barrier may trigger a further rally. BLOOMBERG