Chinese housing stocks fall as caution grows after a record rally

(Bloomberg) — Shares of Chinese developers fell after an unprecedented rally, fueling a broader market pullback as investors reassessed the sector’s risks.

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A Bloomberg Intelligence gauge of Chinese property firms fell as much as 16 percent on Thursday, ending a five-session winning streak that included Wednesday’s whopping 47 percent surge. Shimao Group Holdings Ltd. and Sunac China Holdings Ltd. were among the top losers.

The developers’ decline comes as an epic rally in Chinese stocks has stalled, with profit-taking set in after gains of more than 30 percent since a September low. Further darkening the mood towards the sector was a warning from JPMorgan Chase & Co. on elevated risks in further pursuit of a sentiment-driven rally given the demanding valuations.

While authorities appeared eager to support the industry, details of policy easing announced over the past week or two showed that “the magnitude is actually not as strong as some investors might have expected,” JPMorgan analysts wrote led by Karl Chan in a dated note. Wednesday. “If the data or policy support turns out to be weaker than expected, the magnitude of the correction could also be drastic.”

Investor sentiment toward the economy no. 2 in the world has turned considerably better since last week, when Beijing unveiled new stimulus measures that included interest rate cuts, cash relief for banks and liquidity support for stocks. Four major cities also lowered barriers to buying homes and the central bank moved to lower mortgage rates.

The stepped-up efforts to rescue the housing market came after the country’s slump in home sales deepened in September.

Most investors expect the rally in Chinese developer stocks to end around mid-month to late October, JPMorgan analysts wrote, adding that it was difficult to assess upside potential from a valuation perspective in a sentiment-driven rally.

Instead, the Wall Street bank recommends property management stocks including China Resources Mixc Lifestyle Services Ltd. and Poly Property Services Co., citing solid fundamentals and still “comfortable” valuations.

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