The Bull Case for China Stocks Is Sticking Around

(Bloomberg) -- Investors hoping for even more gains from Chinese equities have reasons to stay optimistic.

Even after a 30 percent surge in the Shanghai Composite Index this year, stimulus from the Chinese government is keeping the bulls going. Authorities will support fundraising of the nation’s small and medium-sized companies via more channels including capital markets, state-run CCTV reported over the weekend. That came after last week’s improving factory activity gave investors confidence that the measures are working, with progress on the trade front also helping sentiment.

“I think it’s just the beginning” of China’s stock rally, said Banny Lam, head of research at CEB International Investment Corp. on Bloomberg Television. “The market right now wants to see the effectiveness of stimulus measures. PMI figures in March actually showed domestic demand is very strong, boosted by that stimulus. All these things are just a start.”

The Bull Case for China Stocks Is Sticking Around

On trade, Larry Kudlow, the top economic adviser to President Donald Trump, said the U.S. and China are “closer and closer” to a deal, and top officials will continue talks this week via teleconference. Kudlow expressed “guarded optimism, maybe more than guarded optimism” in a Sunday appearance on CBS’s “Face the Nation,” after China’s state-run Xinhua news agency also reported progress during the discussions in Washington that ended Friday.

While Chinese shares are still about 9 percent away from last year’s high -- unlike the S&P 500 Index, which on Friday came within striking distance of its peak from September -- they are the world’s best performers this year. The CSI 300 Index of the top stocks in Shanghai and Shenzhen has climbed even more this year, up 35 percent.

“In just a few months, the Asian powerhouse has transformed from a major threat to world economic stability to its saving grace,” Patrick Zweifel, chief economist with Pictet Asset Management, wrote in a report this month. “The proactive stance is paying off, which bodes well for Chinese assets, as well as emerging markets more broadly.”

Zweifel estimates Beijing’s accelerated reforms and stimulus measures, including tax cuts, infrastructure spending and monetary easing, are worth some 2.8 trillion yuan ($417 billion), with about a third of that filtering through to the economic expansion.

That said, some investors are on alert for signs the market is overextended. Consider this: The Shanghai Composite rallied 8.4 percent in the five days ended Thursday. It erased gains of as much as 1.3 percent on Monday as it reopened after a holiday Friday.

“We will watch for potential sentiment overshooting as the market now trades closer to our target price,” Morgan Stanley equity strategists led by Laura Wang wrote in an April 7 note. They forecast the CSI 300 will close the year at 4,300 -- 6 percent above the last close. “Currently the A-share market is not particularly overheated.”

Stock-Market Summary

  • MSCI Asia Pacific Index up 0.1%
  • Japan’s Topix index down 0.3%; Nikkei 225 down 0.2%
  • Hong Kong’s Hang Seng Index up 0.5%; Hang Seng China Enterprises up 0.9%; Shanghai Composite little changed; CSI 300 down 0.1%
  • Taiwan’s Taiex index up 0.9%
  • South Korea’s Kospi index little changed; Kospi 200 little changed
  • Australia’s S&P/ASX 200 up 0.6%; New Zealand’s S&P/NZX 50 down 0.5%
  • India’s S&P BSE Sensex Index down 0.5%; NSE Nifty 50 down 0.6%
  • Singapore’s Straits Times Index down 0.2%; Malaysia’s KLCI up 0.2%; Philippine Stock Exchange Index up 0.5%; Jakarta Composite down 0.7%; Vietnam’s VN Index up 0.8%
  • S&P 500 e-mini futures down 0.1% after index closed up 0.5% in last session

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