A bullish consensus for Chinese shares is emerging on Wall Street, with new-found optimism around President Xi Jinping’s policy pivots and November’s epic stock rebound prompting some major banks to move away from their long-held bearish views.
Morgan Stanley, notable for its cautious view, lifted its targets for the country’s stock gauges last week, expecting the MSCI China Index to rally 14% by the end of next year. Bank of America Corp. has turned tactically positive on China, where some key equity gauges lost more than a third of their value in the year through October, making them the world’s worst performers.
JPMorgan Chase & Co. had moved even faster, calling the market meltdown late last month a buying opportunity, a breakaway from the bank’s “uninvestable” label for Chinese internet firms earlier this year.
Driving the confidence among sell-side analysts are the surprise policy shifts in recent weeks, from easing rigid Covid controls to stronger remedies for real estate woes and efforts to improve ties with the US. The moves have rekindled enthusiasm for the market after a $6 trillion rout that culminated in last month’s Communist Party congress, where Xi’s precedent-defying power grab triggered fears of ideology trumping pragmatism.
China markets have reached “the kind of valuation discount that we thought would be characterized by a really bearish scenario. So now with incrementally more positive news flow, it can start to do better,” Jonathan Garner, Morgan Stanley’s chief Asia and emerging market equity strategist, said in an interview last week. The bull market could last for quarters, he added.
The MSCI China Index has jumped almost 24% this month, poised for its best performance since 1999, after losing 17% in October. The Hang Seng China Enterprises Index of Chinese stocks listed in Hong Kong and the NASDAQ Golden Dragon China Index are also in bull market territory, which is defined by a 20% rebound from a recent low.
The latest rally may have legs if China’s exit from Covid Zero continues and its economy further recovers, according to Laura Wang, the chief China equity strategist at Morgan Stanley. “I don’t think it has fully priced in all the benefits from a full reopening, a consumption rebound, macro stabilization, and job opportunity rebound yet.”
Garner and his team had correctly predicted deepening routs in emerging and China markets earlier this year.
Many of Wall Street’s major banks were bullish on China going into 2022, touting easing regulatory headwinds on tech, growth-friendly economic policies and attractive valuations. Goldman Sachs Group Inc., for one, had expected double-digit gains in Chinese stocks this year.
However, punishing Covid lockdowns, a housing slump, and the risk of potential delisting of dozens of local firms from the US triggered a relentless selloff.
With the market staging a remarkable rebound this month, Goldman Sachs is predicting a further rally. Both the MSCI China Index and the CSI 300 Index will rise by 16% in the next 12 months, the most in Asia, strategists including Timothy Moe wrote in a note last week.
Global funds have bought around a net 41 billion yuan ($5.8 billion) of onshore Chinese shares so far this month via trading links with Hong Kong. That’s after net outflows of 57.3 billion yuan in October, the biggest since March 2020.
Still, several market watchers have said that the execution of the policies announced by Chinese authorities is the key thing to watch out for over the next few months. It thus remains to be seen if bullishness from sell-side analysts will lead to sustained flows from real-money investors.
A resurgence in Covid cases is already tempering expectations for big changes to the Covid Zero strategy.
JPMorgan Asset Management sees some US institutional investors continuing to reallocate funds from China to other emerging markets due to challenges and uncertainties surrounding its domestic politics, Taiwan and tensions with the US.
The recent rally is driven in part by speculators reversing a wave of bearish bets, said Julien Lafargue, chief market strategist at Barclays Private Bank. “We haven’t seen yet the real buying into China, and I think people will want to see evidence of reopening, better economic data coming out of China before they make that move.”
Meanwhile, November’s surge has seen China’s offshore stocks, which suffered more during the long downturn, bouncing back more strongly than their counterparts in Shanghai or Shenzhen.
Analysts say the most profitable bets are likely to be among shares in Hong Kong and New York, as they remain much cheaper than onshore peers. Their higher exposure to the consumer sector — which is seeing strong pent-up demand — is also seen as an advantage. Morgan Stanley last week closed its preference for onshore equities.
The Hang Seng gauge of Chinese stocks in Hong Kong is still down almost 26% this year. The CSI 300 has climbed 8.4% in November, paring its 2022 loss to 23%.
Recalibration of Covid policies and property measures “could be a game changer for the challenging offshore China market,” HSBC Holdings Plc analysts, including Raymond Liu, wrote in a recent note.