(News Bulletin 247) – Since February, the CSI 300 has gained more than 13% and the Hong Kong Hang Seng has jumped more than 19%. A rebound due to scrappy valuations but also to reassuring economic indicators.

China is very clearly a long-term disappointment for investors, whether for the mainland Chinese markets or for Hong Kong. The CSI 300, which brings together large caps from Shenzhen and Shanghai, lost more than 11% last year, its third consecutive year of decline.

Growth and demographics in a clear slowdown, structural crisis in the real estate market, geopolitical and political risks constitute the known ingredients of a bad cocktail which has frightened foreign investors.

But since February, a clear rebound has been observed. The Hang Seng, Hong Kong’s main index, rose by more than 19% while the CSI 300 advanced by more than 13%.

A return to form which can be partly explained by the falling valuation of Chinese shares, with Syncicap AM wondering at the start of the year if they had not become “too cheap to ignore”. This seems to have particularly benefited Hong Kong, a place traditionally more popular with foreign investors than the markets of mainland China.

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A little more engaging growth

“Things are changing,” Alvin Cheung, associate director of Prudential Brokerage in Hong Kong, told the Financial Times. “A relatively lower valuation has become an attractive feature when other major markets are not steadily rising. Institutional investors are currently reallocating funds from other markets to Hong Kong… and the momentum is strong,” he said. -he adds.

But this is not the only reason for the renewed form of Chinese stocks. Investors seem to be putting China back on their radar, becoming more positive about the economic outlook. In its latest April survey of asset managers, Bank of America noted that their optimism about Chinese growth had reached its highest level in almost a year.

Stephane Deo, economist and “senior portfolio manager”, noted on X (ex-Twitter) that the “good surprises” index, measuring better-than-expected economic indicators, was higher in China than in the United States in April and for the first time in more than a year.

The growth of the first quarter, at 5.3% over one year, was particularly surprising, with the market only expecting an increase of 4.8% over the first three months of the year, due in particular to a good investment performance, noted Bank of America.

“The unloved and underperforming Chinese stock market may show signs of recovery as China’s economic growth beats forecasts,” Morningstar wrote in April.

Richard Tang, China strategist at Julius Baer bank, however, considers that the primary catalyst for Chinese stocks remains geographic rotation. “Global investors are taking profits on American, Japanese or global technology stocks and turning to Chinese stocks to benefit from a rapid rebound,” he told Bloomberg.

The American agency also noted this week that the Chinese Communist Party seemed to be moving towards new measures to resolve the real estate crisis, the great handicap of the Chinese economy, in particular by reducing borrowing costs.

“We feel (…) that there is now a political will to resolve (the) problems of confidence by first trying to stabilize real estate, even if it means adopting unconventional means of monetary policy,” observed for his part end of April Syncicap AM.

“Cautious optimism”

Will the rally in Chinese stocks continue in the medium term? Cautious optimism seems to be forming, even if the rebound appears somewhat fragile. Quoted by Nikkei Asia, Goldman Sachs notes that the recent surge can be explained by the desire of market players not to miss the rebound, without this illustrating a return of long-term investors.

In March, Capital Economics questioned at length the potential of the Chinese markets. His conclusion was that while valuations remained attractive, and could therefore fuel a short-term rebound, the longer-term potential risked being penalized by “the difficult geopolitical context (which) could somewhat frighten foreign investors”.

Nicolo Bragazza of Morningstar sees several reasons to position himself on the country. “There is a lot of pessimism in the valuations of Chinese stocks, and we think that this pessimism is not in line with the underlying fundamentals of the companies”, while the margins of the companies should rise, he said. explained in a video published by the financial intermediary.

UBS, for its part, revised its opinion upwards at the end of April, moving to “overweight” on Chinese stocks. The Swiss bank was more positive about the outlook for Chinese groups’ results due to “the first signs of a recovery in consumption, as shown by the robust figures for spending linked to the end-of-year holidays”. “For us, any rebound in consumer confidence means that household savings could be injected into consumption… and into the markets,” she added.

“The biggest risk for valuations in China could be the intensification of geopolitical noise in the run-up to the US elections in November,” she nevertheless warned.

“I think the expression that everyone uses is cautious optimism,” James Kenney, senior investment manager at Pictet Asset Management in Hong Kong, told Bloomberg. “The initial situation, characterized by a cheap valuation, a low property rate and government support, is positive. Macroeconomic conditions will remain difficult,” he says.