JPMorgan sees sustained rally in Chinese equities, upgrades property bonds on recovery prospects

China reopening has quickened and has potential to drive a market revaluation, JPMorgan Private Bank says
Property bonds get upgraded to neutral after a period of cautious stance, although the housing market is not expected to recover before June

China stock market

Jiaxing Li

Published: 3:34pm, 17 Jan 2023

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Chinese stocks are likely to continue rallying as the recent market tailwinds will drive a revaluation, JPMorgan Private Bank said. The credit market is also likely to get a leg-up after the reopening, while the outlook for the yuan is less rosy, it added.

Recent catalysts, including the end of zero-Covid policy, supportive property measures and easing geopolitical tensions, have provided more upsides for equities even after rapid gains over the past two months, analysts including Alex Wolf said in a note to clients.

“Arguably, the policy U-turn has happened at a much faster pace than anyone’s imagination,” they said. The sentiment and liquidity inflows have already improved in recent weeks thanks to the positive changes, which will drive the market valuation towards its long-term level, they added.

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“The broad market is a buy-on-dip market, thanks to further fiscal, monetary and regulatory policy shifts,” the private banking arm of America’s biggest bank said. It “strongly recommends” latching onto the reopening theme and picking up inexpensive internet companies.

The MSCI China Index, which tracks over 700 Chinese companies listed at home and abroad, has surged nearly 16 per cent since December 7, when China substantially scrapped its Covid-19 curbs to help shore up the economy. The reopening has helped restore more than US$1 trillion of capitalisation in Hong Kong and mainland bourses as global funds bought at the fastest pace in at least four years.

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Despite the rally, Chinese equities are still undervalued compared with their global peers. The forward 12-month price-earnings ratio of stocks in the MSCI China Index stood at 12.4 times, versus 17.5 times for MSCI World Index.

That has encouraged Wall Street heavyweights to bump up their buy calls on Chinese equities. Morgan Stanley last week raised its target for MSCI China to 80 by year end from a previous forecast of 70. Goldman Sachs said on January 9 they expect the index to rise by about 15 per cent this year.

Besides equities, China’s US dollar-based corporate bonds are also expected to outperform, JPMorgan Private Bank said. Tech giants, with their strong credit fundamentals and attractive valuations, are among its top buys.

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At the same time, the bank also upgraded bonds issued by Chinese developers to neutral, given the concrete policy and liquidity support from the government. Even so, the private bank prefers state-owned developers and selective strong privately-owned peers, saying the housing market recovery is likely to take time.

As for the country’s currency, the sentiment was also boosted by the recent reopening optimism, but it will likely trade weaker later this year when outbound tourism resumes and stokes capital outflows, the private bank said.

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