China stock rebound rally still has legs- CICC
Chinese stocks may still have space to push higher after a stellar rally over the past three months, analysts at CICC wrote in a note, citing persistent policy support and improving economic conditions.
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China’s Shanghai Shenzhen CSI 300 and Shanghai Composite indexes rebounded some 17% and 18%, respectively, from multi-year lows hit in early-February. They were now close to entering a technical bull market from those lows.
While most sectors benefited from a mix of bargain buying and policy hopes, CICC analysts noted that the agriculture sector outperformed during the rally, as did the heavily battered property sector.
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CICC analysts said that China’s economic recovery was still underway despite some recent signs of cooling, although it still faced some near-term challenges. Beijing was also seen steadily rolling out policy support for the economy, as well as more capital market reforms.
Recent, laggard performances in U.S. and Japanese markets- which were the top performers through 2023- also drew some foreign capital flows into Chinese markets. This trend may continue in the coming months, especially amid uncertainty over the path of interest rates in both countries.
Watch for these three themes in Chinese markets- CICC
CICC analysts said three major themes are expected to take prominence in Chinese markets as they recover this year.
Firstly, growth-oriented technology sectors exposed to growing industry trends, such as semiconductors and communications, which have shot into the spotlight thanks to increased interest in artificial intelligence.
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Secondly, core asset makers- specifically those of lithium-ion batteries, photovoltaic power and wind energy- were due for recovery after seeing sharp corrections in the past two years. But they were also set to benefit from increased policy support.
China’s stock demand presents a mixed picture right now (May 16, 2024):
Signs of increasing demand:
- Recent rally: Chinese and Hong Kong stock markets have seen a significant rally in recent months, possibly reflecting:
- Economic rebound expectations: Investors might be anticipating an improvement in the Chinese economy.
- Policy support: The Chinese government has implemented measures to stimulate growth, which could boost stock prices.
- Tech sector strength: Technology shares, particularly those listed in Hong Kong, have been driving the rally.
- Gold demand: Investment demand for gold in China remains strong, potentially indicating a shift towards safe-haven assets, but also some investor interest in the market.
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Uncertainties and potential headwinds:
- Fundamentals vs. rally: The recent gains might not be fully supported by economic fundamentals. Some analysts believe a correction could be coming.
- Deflation and policy: China is grappling with deflation, which could limit the sustainability of the rally without looser monetary policy. However, looser policies might weaken the yuan and harm domestic demand.