A mounting consensus among investment banks, including Goldman Sachs, UBS, and BNP, indicates an increasingly optimistic outlook on Chinese stocks. This sentiment precedes the July plenum and is bolstered by projections of substantial increases in A share valuations and a widening valuation gap between Hong Kong stocks and US stocks, as reported by Goldman Sachs. Furthermore, UBS has raised its rating on the MSCI China Index and Hong Kong stocks to overweight, attributing this to earnings resilience and policy support.
According to a report by Japanese investment bank Daiwa Capital Markets, foreign selling of Chinese stocks has decreased, and international hedge funds are shifting their investment positions from US or Japan stocks to China stocks. This shift follows the release of new guidelines that emphasize the quality of listed companies, regulatory supervision, and investor protection, marking a departure from previous policy frameworks focused on development.
BNP Paribas has upgraded its view on the MSCI China index, aligning with the bull case as the new base scenario, indicating a potential 4% additional upside from current levels. This positive outlook is further supported by macroeconomic data from the world’s second-largest economy, suggesting that the economic downturn in China may be waning. There is a growing belief that China can still achieve the 5% GDP growth target, despite the economy not yet operating at full capacity.
Nevertheless, caution is warranted due to lingering concerns related to the unresolved property crisis, deflationary risks, and subdued consumer demand. Nonetheless, a strong commitment to stimulating growth, particularly in discussions regarding potential property destocking measures, reflects a noticeable trend towards increased interest in Chinese equities. According to analysts at DBS Bank, Chinese equities seem to serve as a reasonable hedge for global investors, given that the valuation gap between Hong Kong and US stocks is currently at its widest on record.
Daiwa Capital Markets suggests that while the recent surge in Chinese stocks has been primarily driven by fund flows and sentiment rather than fundamentals, this marks a promising start for the return of foreign capital. While Chinese stocks may not yet be poised for a multi-year rally, it is anticipated that the substantial outperformance of US and Japan equities over A-share and Hong Kong ones over the past two years will taper off in 2024.
In conclusion, despite the cautious approach, investment banks are increasingly optimistic about Chinese stocks, and a potential shift in the investment landscape appears to be on the horizon. Whether these expectations will materialize remains to be seen, but for now, a sense of cautious optimism prevails among foreign investors.