Chinese Stocks Show Positive Outlook, According to Gavekal Research

Chinese stocks are set for a potential rebound in the upcoming months, according to Gavekal Research, which notes that these equities are currently undervalued following a period of prolonged underperformance. There is also an expectation that the Chinese government will introduce additional stimulus measures.

In a note released on Monday, Gavekal expressed a strong bullish outlook on Chinese equities, encouraging investors to maintain a long position in the market. They recommended taking the opportunity to invest in Chinese stocks before the anticipated onset of the next bull run.

This optimistic assessment came just a day prior to the announcement of several stimulus measures by China, including reductions in bank reserve requirements, lower mortgage rates, and potential liquidity support for local stocks. As a result, the Shanghai Shenzhen CSI 300 and Shanghai Composite indexes both rallied over 2% after recently hitting eight-month lows. Meanwhile, Hong Kong’s Hang Seng index increased by more than 3%.

Gavekal pointed out that the Chinese market is currently undervalued relative to gold, with dividend yields for Chinese stocks surpassing government bond yields. This situation has only occurred twice in the past, both times leading to significant market rallies.

Moreover, Gavekal indicated that the ongoing lackluster performance of the stock market may prompt the government to introduce further stimulus measures, which could include tax cuts for domestic companies.

Over the last two years, Chinese stocks have underperformed compared to other markets in Asia. A sustained trend of deflation and a prolonged downturn in the property market have largely driven investors away from local markets. However, this situation has led to the perception that several prominent Chinese companies, particularly major internet firms, are now trading at appealing discounts.