Stock market skepticism in China grows stronger as the global race widens

(Bloomberg) — The global rally in Chinese stocks is failing to convince many global fund managers and strategists.

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Invesco Ltd., JPMorgan Asset Management, HSBC Global Private Banking and Wealth and Nomura Holdings Inc. are among those who are skeptical of the recent rebound and expect Beijing to back up its stimulus pledges with real money. Some are also concerned that many stocks are already reaching overvalued levels.

Chinese stocks have soared since late September as a wave of economic, financial and market-supporting measures revived investor confidence. The Hang Seng China Enterprises index, which includes Chinese stocks listed in Hong Kong, has risen more than 30 percent in the past month, making it the best performer among more than 90 global stock indexes tracked by Bloomberg.

“In the short-term, sentiment may overshoot, but people will go back to fundamentals,” said Raymond Ma, Invesco’s chief investment officer for Hong Kong and mainland China. “Because of this growth, some stocks have become really overvalued” and lack a clear value proposition based on their likely earnings performance, he said.

The stimulus announced by Beijing included interest rate cuts, the release of cash at banks, billions of dollars in liquidity support for stocks and a vow to end a long-term slump in property prices. While there’s plenty of optimism that could support a sustained rally in stocks, there have been a number of false dawns before, most recently a rally in February that went flat.

The rally over the past two weeks has seen Chinese stocks reassert their influence on broader emerging market benchmarks and hurt the performance of fund managers that had underweight positions in the developing world’s largest economy. The durability of the rebound will matter not only for the year-end performance of index-tracking funds, but will also have direct implications for nations with trade and investment ties to China.

Ma at Invesco, which has been one of relatively few China bulls to come in this year, said it is in no rush to add to its investments now.

“There is a group of stocks whose share prices are up 30% to 40% and close to all-time highs,” he said. “Whether the fundamentals in the next 12 months are as good as they were before they peaked, that’s more uncertain for me. That would be the category we would like to cut.”

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JPMorgan Asset Management is equally cautious.

“Further policy steps would be needed to boost economic activity and confidence,” said Tai Hui, chief market strategist for Asia Pacific in Hong Kong. “The policies announced so far may help ease the process of deleveraging, but balance sheet repair should take place.”

Hui also pointed to global uncertainties that could squeeze growth in emerging stocks.

“With the US election just a month away, many investors would argue that the US view of China as an economic and geopolitical rival is a bipartisan consensus,” he said. Moreover, “foreign investors may choose to wait for the economic data to bottom out and for this new direct policy to consolidate,” he said.

Growth retardation

HSBC Global Private Banking remains concerned that the steps China has taken are not enough to reverse the nation’s long-term growth prospects.

“More significant fiscal easing is still needed to sustain recovery momentum and sustain growth to reach the 5% GDP growth target in 2024,” said Cheuk Wan Fan, Asia investment director at the bank private from Hong Kong. “For now, we remain neutral on Mainland China and Hong Kong stocks, based on our expectation that China’s GDP growth will decelerate from 4.9% in 2024 to 4.5% in 2025.”

“go ahead”

Still, some remain bullish, saying valuations are cheap because of the three-year selloff.

“The rally can run, there is still a lot of money that needs to be rebalanced. particularly from global investors,” Matthew Quaife, global head of multi-asset investment management at Fidelity International in Hong Kong, told Bloomberg Television.

“We know that valuations are still below average and could technically go further. This could have more legs and how much goes into earnings is a bigger question,” he said.

Potential bust

Nomura Holdings Inc. is among the most pessimistic, warning that the rally could quickly turn from boom to bust.

In the worst-case scenario, “a stock market mania would be followed by a crash, similar to what happened in 2015,” Nomura economists led by Hong Kong-based Ting Lu wrote in a note to clients. That outcome may have a “much higher probability” than more optimistic scenarios, they said.

“Challenges” related to links

Some investors and strategists are also cautious about what the stimulus blitz means for bonds and the nation’s currency.

China’s bonds have fallen since the rally began, at least temporarily ending a period in which yields set successive record lows as investors bought safe-haven assets.

“There are still major challenges to overcome and it is not an easy road,” said Lynn Song, chief economist for Greater China at ING Bank in Hong Kong. “We need to make sure this policy blitz is effective in stabilizing the downward trajectory of the housing market and not just resulting in a flow of hot money into equities.”

Bonds may become a beneficiary if the stock market cools, Song said. “There is certainly a risk that we will go back to the environment of the previous months if something goes wrong in the next steps.”

Yuan traders will be keeping an eye on the central bank’s daily reference rate, the level around which the currency is allowed to trade, on Tuesday. The onshore yuan has strengthened more than 1% in the past month to approach the key level of 7 per dollar. A break of this barrier can trigger a new rally.

What to watch

• China releases foreign exchange reserves data for September

• A number of countries publish inflation data, including Thailand, Brazil, Mexico, Chile and Argentina

• Central banks in India, Peru and South Korea announce interest rate decisions

• Mexico and India release industrial production data

–With assistance from Shulun Huang and Carolina Wilson.

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