China Stocks Seen Staging Comeback as Growth Fuels Risk Appetite

(Bloomberg) -- China's equity markets are likely to receive a renewed boost this quarter thanks to a revival in domestic consumption and a stronger economic growth outlook. 

The benchmark CSI 300 Index is expected to advance some 5.2% by end-June to beat its global peers, according to the majority of 21 analysts and money managers surveyed by Bloomberg News. China's strengthening economy and the stock market's status as a relative haven will be key drivers, according to the poll.

“The Chinese economy is in the midst of a cyclical upturn and corporate earnings are likely to be in an upturn as well in the second and third quarters,” said Redmond Wong, strategist at Saxo Capital Markets HK Ltd. “The relatively underweight position in Chinese equities also help lend support to our outperformance call for the Chinese, including Hong Kong stock markets in 2023.”

Money managers are debating what's in store for Chinese stocks as the buying frenzy spurred by the dismantling of virus curbs late last year grinds to a halt. Signs of a broadening economic recovery and the easing of a regulatory crackdown are fueling optimism, although a defensive stance by hedge funds points to risks ahead.

The upbeat survey results suggest China's reopening trade will gain a second wind this quarter, with the projected level for the CSI 300 Index around the highs reached just after the nation abandoned its Covid curbs.

The benchmark gauge has declined about 4% from its late January peak. It had rallied almost 20% since end-October, about double the gain posted by the MSCI ACWI Index.

A recent string of positive data is fostering optimism among those surveyed that the CSI 300 Index will advance 11% from Friday's close through year-end. The latest data showed China's services activity picked up strongly in March while earlier reports indicated consumer spending, industrial output and investment climbed in the first two months of the year.

Premier Li Qiang sought to shore up sentiment Thursday, saying authorities “have the confidence and ability to sail the giant ship of the Chinese economy steadily ahead.” Officials are targeting growth of around 5% this year.

There are a number of near-term risks on the horizon, to be sure. Consumption growth may disappoint and US-China ties have the potential of deteriorating further as tensions escalate in the Taiwan Strait.

But for now, optimists are focused on the upside, helped in part by attractive valuations for Chinese shares. The CSI 300 Index is trading at just 12 times projected earnings versus a multiple of 18 for the S&P 500.

Consumer and technology stocks are poised to be the biggest winners this quarter, according to the survey, which views shares linked to raw materials, energy and property less favorably.

The bullish sentiment is also expected to spill over into Hong Kong stocks, with the survey predicting that the Hang Seng Index will climb 5% by the end of the quarter. The forecast implies that the gauge is unlikely to top the peak reached in late January.

“You have all the stars lining up,” Jing Ning, head of equities at FIL Fund Management (China) Co., said at a March 28 briefing. “The reopening trade is going to surprise the market on the upside as we move closer to the summertime.”  

--With assistance from Jeanny Yu, Abhishek Vishnoi, John Cheng, Mengchen Lu, Charlotte Yang, Helen Yuan and Cynthia Li.

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