China’s US$1.3 trillion stock rebound rewards contrarian funds with three barriers challenging path to next level

Name: Shanghai residents confront officials after swift return of lockdown
Uploaded: 2022-06-12T23:30:21.000Z
Duration: 1 min 31 s
Description: Shanghai residents confront officials after swift return of lockdown

A technical barrier is approaching as the Shanghai Composite Index attempts to scale 3,400 points, a level associated with large trading volume and price retreat

Industrial output and retail sales probably weakened last month, among key economic data this week to test investor appetite

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The Bund Bull statue and a screen displaying a thank you message for healthcare workers in Shanghai on June 1 when the city ended a lockdown. Photo: Bloomberg

Zhang Shidong

Published: 7:30am, 13 Jun 2022Updated: 12:11pm, 13 Jun 2022

A US$1.3 trillion rebound in Chinese onshore stocks from April’s sell-off is fuelling belief that the market is past its worst slump this year. The next struggle will be overcoming a technical market barrier and pessimism over corporate earnings and the economic outlook.

Investors should consider selling into the latest recovery as earnings and valuations come back into focus, Manulife Teda Fund Management said. Local shares could also drift sideways on sluggish economic data, according to HSBC Jintrust Fund Management and China International Fund Management.

The euphoria following the end of citywide lockdown in Shanghai has helped yuan-denominated stocks outpace returns in markets elsewhere. The Shanghai Composite Index has climbed 14 per cent from the lowest point in April, while the ChiNext gauge of smaller companies in Shenzhen surged 19 per cent. Benchmarks in the US and Asia-Pacific fell by 0.1 to 6.6 per cent over the same period.

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Shanghai residents confront officials after swift return of lockdown

“Investors should stick to haven plays, such as low-valued brokerages and banks, as we approach a technical resistance,” Manulife Teda, which manages US$9 billion in assets, said in an emailed comment.

While the rally has paid off for foreign funds rushing back into the A-share market, the gauge is coming up against the 3,400-point barrier. The level attracted a spike in trading volume and heavy sell-offs in the past, with the Shanghai Composite spending about 10 months trading around the level last year.

So far, market contrarians have been well rewarded for buying Chinese equities near the end of capitulation. Foreign investors were net buyers for a 10th straight day through Friday, the longest streak since December, scooping up 66.1 billion yuan (US$9.9 billion) of onshore equities via the Stock Connect link with Hong Kong.

An investor watches stock prices board inside a brokerage house in Huaibei, Anhui province. Photo: Shutterstock