Chinese stocks get upgraded as bear-market risks seen tempered by state buying support
The firm upgraded Chinese onshore equities to overweight from neutral within its global and emerging market (EM) allocations, according to a report on Wednesday. It lifted its allocation on their investible or offshore peers to neutral from underweight, saying any losses are likely to be limited in a sell-off.
“We expect Chinese stocks to fall by less than or as much as their global and EM peers in a bear market,” analysts including chief China strategist Arthur Budaghyan said in the report. Potential market support from Chinese state-owned funds could temper potential declines, he added.
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Why investors can expect more market volatility after recent global stock sell-off
Why investors can expect more market volatility after recent global stock sell-off
Global stocks lost more than US$6 trillion in a sell-off on Monday. Risk assets have failed to overcome key technical resistances, BCA said, a breakdown that could lead into a bear market. This year’s rally lacked depth, as gains have been largely driven by big capitalisation stocks, BCA said.
Even though share prices look oversold based on short-term measures, they are not oversold on medium-term indicators, BCA said.
The firm cited the expensive US equity market as an example. The market value of its “Magnificent Seven” – Apple, Alphabet, Amazon, Meta Platforms, Nvidia, Microsoft and Tesla – is equalled to the value of 7,637 Chinese stocks combined, according to its data.
The China stock upgrades appear to be tactical, as BCA remains downbeat on the outlook for the local markets. China’s economic fundamentals over the next six months remain downbeat because of weak demand, while deflation undermines corporate earnings, it added.
“The recent relapse in global manufacturing new orders signals a further decline in EM share prices [and] currencies,” BCA said. “There has been no recovery in global and Asian trade, excluding shipments to the US and sales of AI-related semiconductors. Commodity prices remain at risk of further drawdown.”
Volatility in Asia’s equity markets increased this week as the VIX index, Wall Street’s fear gauge, surged by the most since 1990, according to Bloomberg data. The Bank of Japan raised interest rates to the highest level in 15 years, while US jobs data underwhelmed, sparking a market rout.
“Offshore Chinese stocks are more exposed to global risk-off sentiment than their onshore peers,” BCA said. “Therefore, we do not anticipate Chinese investible stocks to outperform during a global market downturn. They still face cyclical and structural headwinds.”
