China’s equity markets have experienced a volatile start to 2024, with a derivative-induced meltdown causing a decline in Chinese stocks on various exchanges. However, there are signs of optimism as the KraneShares CSI China Internet ETF and the KraneShares MSCI China A 50 Connect Index ETF have shown positive returns since February. Investors are now considering whether this rally can be sustained, with five key points highlighting the potential differences in this breakout compared to previous rallies.
One significant factor contributing to the positive outlook for China’s stocks is the government’s involvement in purchasing Mainland stocks to stabilize the domestic market. Central Huijin Investments, a state-linked entity within China’s sovereign wealth fund, has been particularly active in buying Mainland-listed ETFs and bank stocks. This public display of government support has helped boost investor confidence in the market, with similar strategies having been successful in other Asian markets, such as Japan.
Global investors are also starting to return to Chinese equities, with Southbound Stock Connect flows showing local Chinese investors are already increasing their investments in offshore stocks. As concerns about high valuations in other markets, such as India and Japan, grow, China’s equity market could benefit from a shift in investor allocations towards lower-valuation opportunities. Additionally, new policies introduced by the State Council to support shareholders and encourage dividend payments are further contributing to the positive sentiment surrounding Chinese stocks.
The improving economic landscape in China, as evidenced by GDP growth and consumer confidence indicators, suggests a potential rebound in consumer spending. Online travel bookings during the 2024 holiday season have doubled compared to the previous year, indicating a willingness among Chinese consumers to spend on international travel. With incremental policy support for consumption and increased incentives for purchasing large items, China’s economy is on track for recovery, supporting the positive outlook for the equity market.
Despite the improving fundamentals and supportive policies, valuations in China’s equity market remain attractive, with many companies engaging in stock buybacks to capitalize on the opportunity. The internet and e-commerce sectors, in particular, have seen significant growth in earnings per share estimates, indicating strong potential for continued outperformance. As the current rally in China’s stocks shows signs of being fundamentally different from previous rallies, investors are advised to focus on mega-cap stocks and sectors with improving fundamentals to maximize their returns.
In conclusion, the potential for the current rally in China’s equity market to continue is supported by various factors, including government intervention, returning global investors, supportive policies, a recovering economy, and attractive valuations with improving earnings expectations. For investors looking to capitalize on the opportunities in China’s equity market, focusing on top mega-cap stocks available through the Northbound Stock Connect program and top internet companies through offshore listings could offer potential for significant returns in the coming months.
