It’s Not Too Late to Join the China Rally: HSBC

Chinese policymakers have recently implemented a variety of monetary, fiscal, and equity market stimulus measures. This action has led to a notable 28% increase in the FTSE China A50 index over the past two weeks, raising questions among some investors about whether the opportunity to invest has passed. However, strategists at HSBC believe it is not too late and have upgraded the mainland China market to an Overweight position.

A review by the bank of 30 historical rallies in the FTSE China, each exceeding 10% since 2005, reveals that, on average, such rallies last for 76 trading days and yield gains of around 38%. In at least 25% of instances, the increases have approached 60%.

HSBC analysts noted that Chinese market valuations remain appealing, currently trading at an 18% discount compared to emerging markets, a significant change from a historical average of 5%. Their machine learning valuation models further indicate that mainland China is still about 15% undervalued based on fundamental analysis.

Moreover, investors are presently underweight in mainland China by 230 basis points, placing them in the bottom 10th percentile when compared to historical benchmarks. This suggests the potential for significant inflows into the market in the future.

From a sector perspective, HSBC strategists recommend growth areas such as consumer discretionary and information technology, along with sectors poised to benefit from state-owned enterprise reforms, including telecommunications and high-dividend-yield stocks.

Though the recent stimulus measures are encouraging, HSBC emphasizes that ongoing policy support in the coming months will be essential for improving investor sentiment. Since 2021, there has been a lack of consistent follow-through, particularly regarding fiscal policy. Nonetheless, HSBC believes that policymakers may adopt a different approach this time.

The rapid pace of the current market rally may not be sustainable, according to HSBC, which foresees a possible pullback before the market can regain momentum at a slower rate. Additionally, the upcoming U.S. elections pose a risk, with concerns regarding potential tariffs, including a proposed 60% tariff on Chinese imports.