China’s stock rally holds promise as bullish indicators emerge

BLOOMBERG

Chinese equities have staged a sharp rebound as Beijing makes the right noises on the policy front, and some key market indicators are pointing to more gains.
Bullish technical formations, an improving earnings outlook and rising inflows augur well for stocks after key gauges in Hong Kong and the mainland capped their biggest monthly rally since January. While equities consolidated in the morning session on Tuesday amid more disappointing economic data, traders appear sanguine that authorities will act on their pledges to revive the economy and support markets.
“The stronger policy support will help gradually restore investor confidence, and the inflection point has arrived for A-share market,” Lei Meng, China equity strategist at UBS Securities, wrote in a note.
“As policy measures are implemented gradually and economic activities recover sequentially, A-share market is expected to see a stepwise rise, which could last for months.” Here are five charts to illustrate the improving momentum in Chinese shares:
There is broad participation in the recent rebound, with almost 60% of the members of the blue-chip CSI 300 Index and over half of the CSI Smallcap 500 Index trading above their 200-day moving average. The variance between the two indicates the momentum is driven by large-cap companies, which are expected to benefit more from any improvement in the economic outlook.
Activity in both the Hong Kong and Chinese equity markets is picking up. Turnover of stocks in the financial hub jumped to HK$182.6 billion ($23.4 billion) on Monday, the most since Jan. 30, according to data compiled by Bloomberg. On the mainland, turnover rose to the highest in over a month.
Hong Kong’s equity benchmark cleared a major resistance hurdle after vaulting past the trendline and 100-day moving average zone, setting the stage for further gains.
The Hang Seng China Enterprises Index, which tracks the nation’s stocks listed in Hong Kong, is also exhibiting a similar bullish pattern.
The MSCI China Index’s earnings estimates have stopped trending lower, providing another tailwind for the gauge which is trading cheap relative to historical levels. The 12-month forward earnings estimates for the gauge rose 1.2% in July to record the first increase since January, according to data compiled by Bloomberg.
Overseas investors bought a net 9.3 billion yuan ($1.3 billion) of onshore equities via trading links with Hong Kong on Monday, after scooping up the most shares since January last week. The rising participation may reflect optimism that the rebound in Chinese stocks will prove to be more sustainable than in previous episodes. Foreign funds were net buyers in Tuesday’s session as well.