Chinese stocks are poised for another surge following a recent period of consolidation. A significant meeting in Beijing next month is expected to introduce further supportive measures into the market, according to analysts from Goldman Sachs and Bank of America.
Timothy Moe, chief Asia-Pacific equity strategist at Goldman Sachs, describes the recent pullback as a “healthy correction.” The stimulus-driven rally had become overheated, and the impact of various measures had started to wane. Moe suggests that additional upside could be achieved as policymakers announce new support initiatives. “It’s sort of like the market caught its breath, and we expect another leg up,” Moe commented at a media briefing in Hong Kong.
Since its peak on May 20, the MSCI China Index, which tracks 702 Chinese companies listed both domestically and internationally, has decreased by 6.4 per cent. This decline has been influenced by renewed geopolitical tensions, inconsistent macroeconomic data, and ongoing challenges in the property market, leading investors to secure profits. The Hang Seng Tech Index, which includes China’s tech giants such as Tencent and Alibaba, has fallen over 10 per cent since its last peak and briefly entered a technical correction recently.
The upcoming third plenum in July is anticipated to be a crucial event. During this meeting, President Xi Jinping will gather top Communist Party officials to discuss the future direction of the world’s second-largest economy. Moe expects this plenum to deliver more detailed announcements regarding the property market. Policymakers may have found the market’s response to the previous rescue package underwhelming and thus realise that additional measures are necessary. If the new directives are robust enough, they could provide reassurance to the equity market.
Goldman Sachs’ latest endorsement of Chinese equities follows its bullish stance last month, which contrasted with the views of its Wall Street peers. The bank raised its 12-month targets for the MSCI China Index by 17 per cent to 70 and for the CSI 300 Index of yuan-traded stocks by 5.1 per cent to 4,100. This optimistic outlook is based on the continuation of earnings recovery and valuation expansion.
Undemanding price-to-earnings ratios could facilitate further valuation recovery. Additionally, the nine guidelines announced in April regarding A shares are seen as very positive from a long-term structural perspective, Moe added.
However, risks remain. Upcoming macroeconomic indicators, including the consumer and producer price indices for May, are likely to indicate persistent deflation pressures and an economic recovery that has not yet stabilised. Geopolitical tensions with the US, especially as the US election approaches, could also escalate and unsettle markets.
Winnie Wu, chief China equity strategist at Bank of America Securities, noted that the market is likely to be rangebound in the coming weeks as it waits for new catalysts. Nonetheless, she sees the recent consolidation at higher levels and improving sentiment as constructive signs. Wu believes that these potential “higher lows” could help rebuild market confidence and attract more investors to reconsider the China investment thesis.
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