Stars Are Aligning For A Year-End Rally In China

By John Cheng, Bloomberg Markets Live strategist and reporter

After multiple false dawns, Chinese stock investors may now have enough reasons to look forward to a year-end rally.

The MSCI China Index has advanced nearly 4% in November after three straight months of declines. If history is a guide, that gain may well last into January, repeating a trend of positive returns posted by the gauge through the turn of the year since 2018. This seasonal support aside, improving earnings are also raising optimism.

Chinese stocks have slumped steadily through the year, with several rounds of stimulus failing to erase investor pessimism. Yet signs have started to emerge that the worst has likely passed. Ramped-up support for the ailing property sector and stabilizing geopolitical relations have rekindled appetite, with some investors seeing the potential for a sharp rebound in equities.

“Multiple re-rating could drive a year-end rally,” with large-cap and high-beta stocks expected to lead the rise, BofA Securities strategists including Winnie Wu wrote in a recent note. Structural reforms and new economic growth drivers would still be needed for the rally to sustain, they said.

Earnings momentum for Chinese companies also appear to be improving with third-quarter profit growing 3% on-year, compared to a 6% drop in the previous three-month period, according to UBS Group AG.  

For 2024, earnings-per-share are estimated to grow 10%, “driven by lower property write-off and a modest improvement in margin,” UBS strategists including James Wang wrote in a note.

That’s not to say things are looking all rosy from here. Foreign funds have continued to sell Chinese stocks in November, set for a fourth straight month of outflows. And while the US-China summit has helped ease geopolitical tensions to some extent, their tech rivalry remains an overhang and the property market slump may last for years.  

Still, China is an “attractively valued and under-owned market that has the potential for a sharp recovery,” said Ferdinand Cheuk, a portfolio manager at Templeton Global Equity Group. “With attention to bottom-up fundamentals and diversification, investors should be able to identify quality companies for long-term return, despite the current macro uncertainties.”