(Bloomberg) – A bullish consensus on China shares is looming on Wall Street, with renewed optimism around President Xi Jinping’s pivot policies and a spectacular rebound. of stocks in November prompted some major banks to abandon the bearish stance they had long held.
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Morgan Stanley, notable for its cautious stance, raised its target for the country’s stock gauge last week, expecting the MSCI China Index to rise 14% by the end of next year. Bank of America Corp. have been tactically positive for China, where several key equity measures have lost more than a third of their value in the year to October, making them underperforming companies. worst performance in the world.
JPMorgan Chase & Co. acted even faster, calling the market crisis at the end of last month a buying opportunity, a break from the bank’s “uninvestable” label on Chinese internet companies earlier. this year.
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Fueling sell-side analyst confidence have been unexpected policy changes in recent weeks, from the easing of tight Covid controls to stronger remedial measures for problems. real estate issues and efforts to improve relations with the United States. The moves have rekindled enthusiasm for the market following a $6 trillion drop in prices that culminated in last month’s Communist Party congress, where Xi’s grab for power defied precedent Xi Jinping has raised concerns about ideology overriding pragmatism.
The Chinese markets have reached “the kind of pricing discount that we think will be characterized by a truly bearish scenario. So now with a more positive news flow, it could start to perform better,” Jonathan Garner, Morgan Stanley’s director of emerging markets and Asia strategy, said in an interview on Monday. last week. He added that the bull market could last for quarters.
The MSCI China Index is up nearly 24% this month, poised for its best performance since 1999, after losing 17% in October. The Hang Seng China Enterprises Index of Hong Kong-listed Chinese stocks and the NASDAQ Golden Dragon China Index are also in bull territory, defined by a 20% bounce from recent lows. .
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According to Laura Wang, chief China equity strategist at Morgan Stanley, the latest rally could take effect if China continues to exit Covid Zero and its economy recovers further. “I don’t think it’s fully priced in all the benefits from a full reopening, recovery in consumption, macro stability and job openings.”
Garner and his team correctly predicted a deep downtrend in emerging markets and China earlier this year.
Great expectations
Many of the major Wall Street banks are optimistic about China entering 2022, encouraging easing of regulatory barriers to technology, growth-friendly economic policies and attractive valuations. For example, Goldman Sachs Group Inc. had expected Chinese stocks to post double-digit gains this year.
However, the Covid-sanctioned shutdown, housing slump and the risk that dozens of local US companies could be delisted have caused a relentless sell-off.
With the market recovering significantly this month, Goldman Sachs is predicting another rally. Both the MSCI China Index and the CSI 300 Index will gain 16% over the next 12 months, the highest in Asia, strategists including Timothy Moe wrote in a note last week.
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Global funds net bought about 41 billion yuan ($5.8 billion) of Chinese stocks this month through trading links with Hong Kong. That was after a net outflow of 57.3 billion yuan in October, the largest since March 2020.
‘Buy for real’
However, some market watchers have said that the implementation of policies announced by the Chinese authorities is important to pay attention to in the next few months. Therefore, it remains to be seen whether the bullish bias from sell-side analysts will lead to sustained cash flow from real money investors.
The return of Covid cases has dampened expectations of major changes to the Covid Zero strategy.
JPMorgan Asset Management sees a number of US institutional investors continuing to reallocate capital from China to other emerging markets due to challenges and uncertainties surrounding domestic politics, Taiwan and tensions. with the United States.
Julien Lafargue, chief market strategist at Barclays Private Bank, said the recent rally was partly due to speculators reversing the wave of bearish bets. “We still haven’t seen real buying into China and I think people will want to see evidence of reopening, better economic data from China before they make that move.”
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‘Game changer’
Meanwhile, November’s spike has seen China’s overseas stockpiles, which suffered more damage during a protracted downturn, recover more strongly than their counterparts. cooperation in Shanghai or Shenzhen.
The most profitable bets will likely be among stocks in Hong Kong and New York, analysts say, as they are still much cheaper than their domestic peers. Their greater exposure to the consumer sector – which is seeing strong pent-up demand – is also seen as an advantage. Morgan Stanley last week closed the offer on domestic stocks.
The Hang Seng Index of Chinese stocks in Hong Kong is still down nearly 26% this year. The CSI 300 gained 8.4% in November, reducing its 2022 loss to 23%.
HSBC Holdings Plc analysts including Raymond Liu wrote in a recent note that a readjustment of Covid policies and asset measures “could be a game changer for overseas markets challenging outside of China”.
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–With support from Henry Ren and Abhishek Vishnoi.
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