Tech leads gains as China stocks in Hong Kong extend rebound

Chinese stocks in Hong Kong extended their recovery from a rout earlier this week, as investors focused on a slew of earnings and awaited further policy guidance following the Party congress.

The Hang Seng China Enterprises Index, a gauge of Chinese equities trading in Hong Kong, climbed 0.5%. The third day of advance helped pare losses from a historic 7.3% plunge on October 24. Tech stocks led the broader market higher, though gauges pared earlier gains as momentum weakened in the afternoon.

The overall advance tracks a jump in US-listed Chinese stocks overnight, and suggests sentiment has stabilised somewhat after President Xi Jinping’s renewed power grip at the leadership gathering dismayed investors. While Xi’s dominance suggests the Covid Zero policy and curbs on private enterprise will likely stay, some are starting to focus on cheap valuations and resilient corporate earnings. Wuxi AppTec and ZTE are among companies that reported a jump in third-quarter earnings.

“The rebound is simply because stocks are cheap and oversold,” said Vey-Sern Ling, an analyst at Union Bancaire Privee. “But for any sustained rally we need to see real catalysts from China” including progress on geopolitics, changes to Covid Zero and improvement on the domestic economy, he said.

The CSI 300 Index, a benchmark for mainland shares, reversed earlier gains to end 0.7% lower on Thursday, while Hong Kong’s Hang Seng Index gained 0.7%.

Few expect Chinese stocks to stage a smooth recovery amid Beijing’s growing tension with the US over thorny issues including tech exports and Taiwan. A lockdown in one of Wuhan’s central districts is also the latest reminder that the economy’s growth will continue to be hampered by Covid-19 curbs.

Morgan Stanley slashes china stock outlook Morgan Stanley strategists slashed targets across key equity gauges for China and Hong Kong, citing “heightened volatility and equity risk premium” following the Party congress.

The market will continue to debate “policy priority and the direction of China’s economic and social agenda, as well as geopolitical relations with the US,” strategists including Laura Wang wrote.

The US bank expects MSCI China Index to lose 22% through June 2023 in its bear case and gain 48% in its bull case, wider than its previous range as strategists “acknowledge a wide range of potential outcomes and hence divergence in earnings and in particular risk premia.”

While the bank’s most likely scenario means stocks should rise from current levels, its bear case implies investors will lose confidence in earnings-based valuation approaches and switch to focusing on asset based models carrying book value and dividend yield.

The gap between its bull and bear case targets has risen to 34 index points versus 28 in its prior framework.

Xi’s greater sway over China’s economy and markets after Party Congress has spooked investors, wiping out more than $440 billion from market value of Chinese stocks on October 24.

—Bloomberg