China/HK Markets Rally on Stimulus Measures but Face Investor Skepticism
Lim & Tan Securities
Daily Review | 09 October 2024
Chinese and Hong Kong markets have experienced a significant rally in recent weeks, largely driven by a series of stimulus measures from the Chinese government aimed at rejuvenating investor confidence. However, despite this impressive surge, global fund managers and strategists remain cautious about the sustainability of the recovery, expressing concerns over the potential for overvaluation and the long-term effectiveness of these policies.
Stimulus Sparks Market Rally
Since late September, Chinese equities have seen a robust uptick, with the Hang Seng China Enterprises Index — a key gauge of Chinese stocks listed in Hong Kong — jumping more than 30% in just one month. This makes it the top-performing index among over 90 global equity indices tracked by Bloomberg. The rally has been fueled by a wave of economic, financial, and market-support measures from the Chinese government, which have injected fresh optimism into the market.
Stimulus efforts have included interest rate cuts, the freeing-up of cash at banks, and billions of dollars in liquidity support for the stock market. Moreover, Beijing has pledged to halt the long-term decline in property prices, a critical issue in China’s economic slowdown. These measures have helped restore some confidence in the markets, particularly after a prolonged period of lackluster performance and investor hesitation.
Investor Skepticism Persists
Despite the recent surge, many global investors and analysts remain skeptical. Leading asset managers such as Invesco, JPMorgan Asset Management, HSBC Global Private Banking, and Nomura Holdings have all voiced concerns that the rally may be overextended. They point to the fact that while short-term sentiment has improved, many stocks are already reaching overvalued levels and may lack the necessary earnings performance to justify their current prices.
For instance, Raymond Ma, Invesco’s Chief Investment Officer for Hong Kong and Mainland China, noted that while some stocks have skyrocketed, they have become “really overvalued” and lack a clear value proposition based on their earnings outlook. Ma emphasized that investors need to remain cautious, as fundamentals could eventually reassert themselves, leading to a correction in stock prices.
Uncertainty Surrounding Long-Term Impact
Several analysts also remain uncertain about the long-term impact of the Chinese government’s stimulus measures. While the recent policies have provided a short-term boost, more significant fiscal easing may be required to sustain the recovery and achieve China’s 2024 GDP growth target of 5%. HSBC Global Private Banking’s Chief Investment Officer for Asia, Cheuk Wan Fan, highlighted that more aggressive policy actions might be needed to reverse China’s slowing growth trajectory.
Nomura Holdings offered a more pessimistic outlook, warning that the rally could quickly transform into a boom-and-bust scenario reminiscent of 2015. In a note to clients, Nomura’s economists, led by Ting Lu, suggested that without more substantial and lasting policy changes, the current market mania could be followed by a sharp downturn.
Positive Outlook from Select Investors
Despite the widespread caution, some market participants remain bullish. Matthew Quaife, Global Head of Multi-Asset Investment Management at Fidelity International, pointed out that valuations are still below historical averages from a technical perspective, leaving room for further gains. Quaife highlighted that while the rally has legs in the short term, the more critical question will be whether this momentum can translate into sustained earnings growth for Chinese companies.
Conclusion
The Chinese and Hong Kong markets have shown remarkable resilience in recent weeks, buoyed by a series of government stimulus measures. However, while the rally has instilled short-term optimism, global investors remain cautious about the long-term sustainability of the recovery. Concerns about overvaluation, the effectiveness of the stimulus, and broader macroeconomic uncertainties could temper enthusiasm as the markets move forward. Investors will need to watch carefully for further policy developments and market signals as they assess the trajectory of China’s economic recovery.
Lim & Tan Securities
Daily Review | 09 October 2024
