After multiple false dawns over the past year, some investors are seeing evidence that the recent rebound in Chinese stocks may be different.

Beijing’s determination to end a rout, signs that the economy and earnings are picking up, and a return of foreign inflows are giving investors from abrdn to M&G Investment Management reasons to believe that the market is bottoming out. 

The shift reflects how investors are coming to terms with China’s attempts to restructure its economy, with some betting that President Xi Jinping’s attempt to drive high-tech growth and end a property crisis will start to bear fruit.

Equity benchmarks have rebounded more than 10 per cent from a February low, a performance that likely shows there were buyers beyond state funds. 

“Numerous companies and sectors continue to experience a recovery in revenue and earnings, which should help the share prices of these stocks and sectors,” said Mr Nicholas Chui, portfolio manager at Franklin Templeton Emerging Markets Equity.

“We also expect sectors other than property to take shape and become stronger over time. This will allow the economy to continue to transition away from property in a sustainable manner,” he said.

The current sentiment marks a sharp improvement from just months ago, when Chinese shares were among the world’s worst performers and some big-name investors were cutting exposure.

A steady stream of policy support – from a cut to the mortgage reference rate to more liquidity and a crackdown on quants – is stacking up, even though some investors decry the lack of a big-bang stimulus. 

The CSI 300 Index of mainland shares has gained nearly 13 per cent since a five-year low reached on Feb 2, while the Hang Seng China Enterprises Index has advanced about 15 per cent from mid-January. 

Beijing’s resolve to deliver 5 per cent economic growth in 2024 suggests incremental stimulus will continue to flow in, analysts said. Data shows the economy is on the mend, with inflation back in positive territory for the first time since August and manufacturing and services no longer in a deep slump. 

“We expect high single-digit or low-teens earnings growth overall this year,” said Mr Nicholas Yeo, head of China equities at abrdn. “We expect deflationary pressure to reduce this year, which would provide companies with more pricing power. We are around the range of the bottoming.” 

President Xi’s slogan of “high-quality development” – which prioritises sustainable growth from high-tech industries over the debt-driven expansion of the past – is luring early bets from investors, who argue that state support will drive industries from electric vehicles and hydrogen power to chipmakers and automation.

Traders are also rewarding better-than-expected earnings more generously. Li Auto and Xinyi Solar Holdings each jumped the most in years after delivering better-than expected quarterly earnings, a reversal from 2023 when even positive results failed to boost stocks. The ChiNext Index for China’s growth stocks entered a technical bull market on March 11.

“I think upping your allocation to China probably makes sense now,” Lazard Asset Management’s chief market strategist Ronald Temple said in a Bloomberg TV interview last week. “China could be one of the best-performing equity markets as a trade over the next 12 to 18 months.”  

Foreign money is trickling back in. A Morgan Stanley analysis shows that global long-term investors have taken a pause in selling China, with some funds getting less bearish.  

Mainland shares have seen 1.8 billion yuan (S$338.2 million) of inflows so far in March. If the trend lasts, it will mark two straight months of net buying after a record six-month streak of outflows till January.

Choppy ahead

The upward path from here, however, may well be a slow and choppy grind. Deflationary pressure remains high and the external environment challenging with anti-China rhetoric expected to dominate ahead of the United States presidential election in November. 

Some of China’s market support measures, such as the clampdown on quant trading and massive purchases by state funds, have been controversial, with concerns that they can distort fair pricing and backfire later. Goldman Sachs Group’s wealth management business is telling its clients not to invest in China as the economy struggles.

“Stabilising a stock market is different from a new V-shaped bull market recovery,” said Mr Alan Richardson, senior portfolio manager at Samsung Asset Management. “Breaking above the previous high watermark is a completely different issue. Japan bottomed for 30 years and stayed L-shaped for that long as well.” 

Yet, investors can also make a case that China looks attractive in global markets where record-breaking rallies have made places like India and the US prone to correction risks. 

The MSCI China trades below nine times forward earnings estimates despite the recent rally, compared with readings exceeding 20 each for the S&P 500 Index and MSCI’s India benchmark.  

“China is a constructive long-term investment market and valuations are low,” said BNP Paribas Asset Management multi-asset quant solutions portfolio manager Wei Li. “If you are looking for alpha, I highly recommend you look for that in China.” BLOOMBERG