News
China’s improving market breadth is good news for stock bulls
(Bloomberg) — The rally in Chinese stocks is expected to extend as gains spread to segments that have followed the market recovery.
Bloomberg’s Most Read
The 29% rise in the MSCI China index since the January low has pushed about half of its members above their 200-day moving averages, data compiled by Bloomberg show. This has boded well in the past, with the ratio generally increasing to 80% in the coming months.
The broadening of the recovery will signal greater investor confidence in Chinese stocks, after cheap valuations and political support from Beijing helped lift indicators. Separate analysis of China’s market cycles by HSBC Holdings Plc. and Goldman Sachs Group Inc. shows the gains could continue in the coming months.
“Compared to the previous year, we have seen an improvement in market breadth, which is a good environment for lower stock picking focused on broad sector fundamentals,” said Wenchang Ma, portfolio manager at Ninety One Hong Kong Ltd.
Financial and consumer technology companies contributed most to the recovery in the MSCI China indicator from the January low, while real estate and materials stocks rose more than 40%. There are growing expectations that underperforming sectors such as equipment manufacturers, exporters, technology and real estate will participate in the recovery.
“Small- and mid-cap stocks will benefit as the recovery spreads, given the improving macro credit risk profile coupled with an economic recovery,” said Chi Lo, strategist at BNP Paribas Asset Management Asia Ltd. see a good recovery, since these sectors were severely defeated.”
Positive opportunity
Previous advances of 30% in the Hang Seng China Enterprises Index over a five-month period were followed by a further gain in the indicator over the next four months, with an average return of 25%, according to HSBC. This bodes well for investors looking to purchase shares even after the stock has risen.
Among the buy-rated stocks offering more than 30% upside are Air China Ltd., Alibaba Group Holding Ltd., China Mengniu Dairy Co. and China Tourism Group Duty Free Corp., wrote HSBC strategists including Herald van der Linde and Prerna Garg in a note dated May 20.
Some exporter stocks could also benefit from possible early supply ahead of the US elections and positive political support in their domestic market, said Raj Singh, portfolio manager at Hong Kong-based Principal Asset Management.
The story continues
To be clear, geopolitical tensions with the US and top trading partner Europe continue to be a risk for Chinese stocks. A clear upward trend in profits, which were largely below expectations in the first quarter, is also key to sustaining the recovery.
Still, Wall Street brokers are increasingly bullish on China, with Goldman Sachs raising its 12-month target for some indicators due to falling risks, government support and historical evidence of additional returns after indexes enter a technical bull market.
The expansion of the equity rally “will be an inflection point for Chinese growth and asset price recovery,” BNP’s Lo said.
Bloomberg Businessweek Most Read
©2024 Bloomberg LP