China Stock Analysts Warn There's Too Much Optimism Before G-20

(Bloomberg) -- Chinese equities got a boost Wednesday from news that U.S.-China trade talks are back on. So this is the start of a summer surge, right?

Not so fast, say market watchers. The Shanghai Composite Index could drop 10% in the near term if the countries fail to reach an agreement when presidents Xi Jinping and Donald Trump meet at the Group of 20 summit, according to Cliff Tan, head of East Asia research at MUFG Bank Ltd.

The benchmark equity gauge jumped to its highest intraday level in a month on Wednesday after the two countries said their leaders will meet in Japan next week to restart negotiations after a month-long stand-off. The pair will hold an “extended meeting” at the summit, Trump said on Twitter.

“Sometimes the equity market seems to think that if Xi and Trump shake hands, somehow this deal will magically appear,” Tan said. “I think that’s kind of fanciful.”

Here’s what analysts had to say about stocks and that summit:

MUFG (Cliff Tan)

• The Chinese equity rally this year has been based on the view that we’re ultimately going to get a deal. If the G-20 meeting shows people how far away the resolution might be, the equity level shouldn’t hold where it is
• Shanghai Composite expected to drop another 300 points in that scenario

AMP Capital Investors Ltd. (Nader Naeimi, the head of dynamic markets)

• Stocks have one more leg down and if the Shanghai Composite drops to 2,500 points, it would be time to enter the market
• While a strong rally is possible in the lead-up to the G-20, the gauge will likely fall afterward as a firm deal is highly unlikely
• Even if a notional deal is reached, there is a possibility that market will sell the news, because experience has shown us that any deal can be turned upside-down with one tweet

Central China Securities Co. (Zhang Gang, strategist)

• The market is showing a strong knee-jerk reaction to the positive development on trade, although history suggests there have always been some twists and turns so I’d be cautious
• A shares have been consolidating for a while, and without incremental inflows it would be hard for stocks to really break the range-bound pattern

Shenwan Hongyuan Group Co. (Gerry Alfonso, head of the international business department)

• The latest development is clearly positive but a deal as complex as this will take time and there are going to be ups and downs
• The most likely scenario, given the complexity and short time frame, is some sort of best intentions declaration

To contact Bloomberg News staff for this story: Amanda Wang in Shanghai at twang234@bloomberg.net;Livia Yap in Singapore at lyap14@bloomberg.net

To contact the editors responsible for this story: Sofia Horta e Costa at shortaecosta@bloomberg.net, Philip Glamann, David Watkins

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With assistance from Bloomberg