Li Auto and GDS Holdings are up today, while PDD Holdings is down

Chinese stocks are back in the spotlight today as analysts debate how long the rally could last and Treasuries bounced back after a blowout jobs report on Friday. Electric car manufacturer actions Li Auto (LI 3.79%) and data center operator GDS Holdings (GDS -0.81%) traded 2% and 1.5% higher, respectively. Meanwhile, the e-commerce company PDD Holdings (PDD -1.29%) fell nearly 2% despite an analyst upgrade this morning.

Will the rally continue?

Since the Chinese government and central bank announced a wide range of stimulus initiatives, Chinese stocks have rallied as hedge funds and other institutional investors have bought into the battered sector. The Hang Seng the index, which is composed of the main Chinese stocks listed in Hong Kong, is now up 34% in the past month.

The question for analysts is whether the rally can continue despite struggles in the Chinese economy, including high unemployment, a housing slump and weak consumer demand. The Chinese government is aiming for 5 percent growth in gross domestic product this year, a target that several economists and analysts have questioned.

Goldman Sachs believes the rally can continue, with the sector recently overweighted. Goldman strategists estimate that Chinese indices could still have 15% to 20% more to run if officials stick to their stimulus promises. Valuations are still compelling and earnings could rise, they noted.

Not everyone is in this camp, however. Analysts at Investco and JPMorgan Chase they are still not convinced that stimulus efforts will be able to increase demand and believe that additional measures would be needed. Furthermore, after this recent period, valuations are not as attractive.

According to Bloomberg, Raymond Ma, Invesco’s Chief Investment Officer for Hong Kong and Mainland China, recently said:

There is a group of stocks whose stock prices are up 30% to 40% and near all-time highs. Whether in the next 12 months the fundamentals will be as good as they were before their peak, that is more uncertain for me. This would be the category we would like to cut.

In company-specific news, analysts at Macquarie upgraded PDD Holdings this morning from neutral to outperform and significantly raised their price target from $126 to $224. Analyst Ellie Jiang wrote in a research note that she is bullish on China’s internet sector, which is trading at only half the levels seen in the first quarter of 2023. Jiang also said the sector has “significantly better fundamentals ” and “prudent corporate strategies”. , (which) improves the sector’s revenue visibility.”

Many short-term factors

Despite Goldman’s upbeat call and PDD upgrade, the rally struggled to gain momentum near midday. There are still conflicting narratives, investors could take gains, and a blowout report on Friday sent the 10-year Treasury yield above 4 percent, weighing on most tech and growth stocks. In addition, the US presidential election is less than a month away, and the outcome could have a broad impact on Chinese stocks.

Li, GDS and PDD all have strong potential, especially in the long term. In the near term, however, there are many questions — including valuations, whether the Chinese government will deliver on stimulus promises, whether the stimulus is enough to boost China’s struggling economy and what happens in the election.

For these reasons, I would proceed with caution and not take too large a position in any individual stock or, better yet, invest in a Chinese exchange-traded fund that offers more diversity. The environment may become clearer following the election.