China bulls say it is time to add to mainland stock bets with easing geopolitical tensions and stimulus measures to boost sentiment
- Chinese stocks have fallen out of favour since the reopening play - which saw gains between October last year to January - lost steam
- Policy easing measures and signs of a stabilisation in geopolitical tensions will be key catalysts to shore up sentiment, some analysts say
Beaten-down onshore Chinese stocks are attracting some bullish calls, with strategists from Morgan Stanley, Daiwa and BCA Research saying an intense sell-off could be coming to an end, with the market ripe for a rebound on further stimulus measures and improving geopolitical ties.
Patrick Pan, China equity strategist at Daiwa Capital Markets Hong Kong, wrote in a note to clients on Friday that investors have been trading on China’s weak recovery story since February, and concerns over economic fundamentals and geopolitical tensions are mostly priced in.
“We see the coming June as the second best time of the year to accumulate China equities,” said Pan, provided there are no large Covid-19 outbreaks or a US debt default.
Chinese stocks fall to 5-month low as sluggish recovery weighs on sentiment
“With regards to mainland China exposure, it is back to where we were in October 2022,” Herald van der Linde, head of equity strategy at HSBC, said in a research note on Thursday. Global funds are now “significantly underweight” on mainland China, while Asia funds have moved to a small underweight position as well, he wrote.
The market is likely to move within a small range in the near term as traders still remain cautious, but policy easing measures and signs of a stabilisation in geopolitical tensions will be key catalysts to shore up sentiment and reward patient investors, Laura Wang, chief China equity strategist at Morgan Stanley, said in a note on Thursday.
“Further step-up of easing measures is expected by our economists to arrive around late June or early July,” and GDP growth could reaccelerate in the current quarter, Wang said. While the stabilisation efforts aimed at easing US-China tensions will also be a boost to sentiment, she added.
To be sure, the market is still facing multiple headwinds.
China’s weak consumer spending is likely to continue to disappoint, with industrial sectors remaining under pressure amid a sluggish global economy. Meanwhile, policy easing might not come as early as expected, BCA strategists including Arthur Budaghyan said in a note dated May 24. However, A shares could be one of the few bright spots in the global market, meaning it could be time for investors to put on more bets, he said.
“We recommend that investors overweight Chinese onshore stocks within a global equities portfolio,” Budaghyan said, adding that China’s services, consumer discretionary, and interest rate-sensitive sectors such as utilities and autos will outperform.
