China's stock rally may face a “meaningful correction soon” given its similarities with the 2015 boom and bust cycle, according to strategists at BofA securities.
The Hang Seng China Enterprises Index and the MSCI China Index have both surged at least 30% from mid-January lows, akin to the pace of gains seen in 2015 before the market plummeted, strategists led by Winnie Wu wrote in a Monday note. Having peaked in May 2015, the HSCEI gauge tumbled nearly 50% through February the following year and is yet to scale that high.
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“There are quite some fundamental similarities between the current cycle and 10 years ago, with the economic rebalancing cycle and policy cycle,” the strategists wrote. “Nonetheless, a multiple-expansion-driven rally could be vulnerable.”
BofA's caution stands out in a wave of bullish bets that has swept across Chinese markets this year, driving world-beating gains. DeepSeek's technological advancements and Beijing's determination to achieve economic expansion have fueled a revaluation of Chinese equities that were once overlooked by global funds. Fading conviction over US exceptionalism has also prompted investors to embrace Chinese stocks.
The strategists, citing their investor trip to Shanghai, said long-only investors on the mainland are getting nervous as they worry about a lack of improvement in jobs, deflation and credit demand while the impact from geopolitical tensions has been overlooked. Some investors also see bubbles emerging in some tech areas, BofA said.
The HSCEI gauge slipped as much as 0.9% on Wednesday, before erasing much of the drop. The MSCI China gauge moved in a similar fashion and remains up more than 23% for the year.
In a 2025 outlook report released on Jan. 6 — about a week before DeepSeek shook the world — Wu and her colleagues said the worst of de-rating and flow-selling for Chinese stocks is over. In a Sept. 27 report, they said while investor conviction is low, they are more optimistic about the rally. MSCI China gained another 13% before peaking on Oct. 7
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