Chinese stocks could see a significant uptick as the US Federal Reserve gets ready to announce its first rate cut this week. According to Steven Sun, head of research at HSBC Qianhai Securities, this decision might also trigger a response from the People’s Bank of China, enhancing the outlook for certain sectors.
Sun noted that US monetary easing could serve as a catalyst for revaluation in growth sectors within Chinese markets. He emphasised that growth sectors have historically outperformed value sectors by a considerable margin, on average by 44 percentage points. In his research note to clients, Sun pointed out that such a shift could be imminent.
At present, the iShares MSCI China ETF has seen a decline of nearly 15% since reaching its year-to-date high in mid-May, reflecting the pressure Chinese stocks have been under recently. Much of this pressure comes from global institutions favouring US Treasuries and companies like Nvidia, as higher interest rates in the US made those options more attractive than Chinese counterparts.
However, with the Federal Reserve expected to implement its first rate cut on 18 September, Sun suggested Chinese equities could benefit from an increase in price-to-earnings multiples. He believes that the focus should be on earnings growth. Growth sectors such as semiconductors and consumer electronics, which demonstrated strong earnings in the first half of 2024, are likely to perform well during this period of monetary easing.
Historically, lower US interest rates have led to an increase in global liquidity, some of which tends to flow into emerging markets like China. Furthermore, a stronger US economy, driven by rate cuts, often translates into increased demand for Chinese goods, benefiting companies that are directly tied to this trade.
While the anticipated US rate cut presents an opportunity for Chinese stocks to benefit, the extent of that benefit will largely depend on a combination of global liquidity flows and domestic factors such as business confidence and consumer spending within China.
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