China’s US$1.3 trillion stock rebound rewards contrarian funds with three barriers challenging path to next level
- 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
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.
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Shanghai residents confront officials after swift return of lockdown
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.
As valuations expand with the stock rally, investors should not be too upbeat about the broader market given the likely flow of weak economic data, according to Cheng Yu at HSBC Jintrust. That also applies to the Hang Seng Index, which has advanced 18 per cent from a six-year low on March 15.
Several key economic reports this week could further test investors’ appetite for risk as authorities in Shanghai ordered more mass testing to stem another Covid-19 outbreak. Industrial output probably contracted 1 per cent in May from a year earlier while retail sales shrank 7.1 per cent, according to the consensus forecasts of economists tracked by Bloomberg.
Earlier reports showed Chinese manufacturing and services industries contracted during lockdowns.
China remains steadfast in its zero-Covid policy. The popular view is that it will be enforced until the end of the year despite the huge economic toll and the harsh lessons from the Shanghai lockdown.
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Residents in Beijing satellite city protest against Covid rules limiting acess to Chinese capital
“Investors will need to heed corporate earnings data,” said Cheng, a fund manager at HSBC Jintrust based in Shanghai. “We will need to see listed companies deliver on earnings growth.”
Shoring up demand from consumers and investors will be the top priority of Beijing’s policymakers amid a dire economic outlook, according to Wang Qi, chief executive officer at Mega Trust Investment in Hong Kong. Beijing has taken steps to restore confidence, including cutting mortgage rates for first-time homebuyers and introducing tax breaks on car purchases.
“The key challenge for China’s monetary policy is demand not supply,” said Wang. “The effectiveness of credit easing will largely depend on loan demand, which in turn, is a function of consumer and corporate confidence.”
China’s ongoing recovery is different from its strong and swift bounce-back from the Wuhan outbreak in 2020, which was aided by a booming property market and robust external demand, according to TS Lombard, a London-based research firm.
China’s economy will contract by 1.2 per cent this quarter and full-year growth will be 3.3 per cent, it forecasts, citing wobbling home sales and the spillover effect of policy tightening in developed economies. The infrastructure stimulus to cushion the slowdown will be offset by the zero-Covid approach that restricts mobility and undermines confidence.
“The stock market is likely to be rangebound in the near term,” said China International Fund Management in a report on Thursday. “It would be difficult for stock picks as the sector rotation is happening pretty fast. Investors will need a long-term horizon to position for the theme of stabilising growth.”
