China Stocks “Riding the Dragon’s Tail” Amid Stimulus Swings – MRB Partners

China’s recent stimulus efforts have led to a significant rally in local stocks over the past few weeks. However, MRB Partners has indicated that the outlook for corporate earnings in China remains subdued, suggesting it is premature to upgrade local equities.

The rally in Chinese stocks has primarily been fueled by “unrealistic expectations” surrounding government stimulus measures. While there is a positive economic outlook for China, this optimism has not yet translated into improved corporate earnings.

MRB Partners maintains a Neutral weight on Chinese equities with a potential bias for upgrades within the emerging markets space. Any potential upgrades, however, are contingent upon a broad-based recovery in earnings, of which no evidence has yet surfaced, according to the brokerage.

Despite the recent stock rally, MRB Partners emphasizes that the “fundamental outlook” for China’s markets remains uncertain. Following the announcement of extensive monetary stimulus late in September, the Shanghai Shenzhen CSI 300 and Shanghai Composite indexes reached two-year highs. Yet, subsequent market performance has been volatile, as stocks sharply declined after investors expressed disappointment over the lack of targeted fiscal measures.

In an effort to address investor concerns, China’s finance ministry has announced plans for a briefing to outline future stimulus actions. However, skepticism persists regarding the effectiveness of these measures given the country’s high levels of debt.

MRB Partners cautioned, “When you grab the dragon’s tail, expect a wild ride,” referring to the recent fluctuations in the Chinese market. The brokerage has advised maintaining a neutral position in Chinese stocks within an emerging markets portfolio, noting that other emerging markets may offer better returns. Still, there is an inclination to upgrade Chinese stocks as soon as the earnings outlook begins to improve.