China stocks’ biggest weekly rise rekindles investor hopes

Bloomberg

China stocks’ biggest weekly surge since February is rekindling investor hopes for a strong rally ahead. But don’t expect the sentiment-driven frenzy of last year, analysts say.
The benchmark CSI 300 Index gained 3.6% last week, with turnover nearing the 1 trillion yuan ($157 billion) mark – the most since late February. Foreigners snapped up a record amount of local stocks last week amid a crackdown on commodity prices, while the yuan’s strongest level in five years boosted the appeal of onshore assets. The stock gauge closed up 0.2% on Monday taking its advance for the month to 4.1%.
Investors have been watching whether the gains could presage a sustained rally and re-energize a market that’s been in limbo after being stuck in range-bound trading for months. Now there may be plenty of reasons to buy. Fears of policy tightening and expensive valuations have eased, while the Communist Party’s centennial in July promises bouts of market stability ahead.
“The rebound as we can see has already started,” said Lin Menghan, fund manager at Shanghai Xiejie Asset Management Co. “It’s likely there will be a gradual move up for the index in wide N shaped swings. It’s also likely there will be friendly monetary and industrial polices rolled out over the next few months.”
Some analysts see the rally to accelerate at a stronger pace. Guotai Junan Securities is predicting an end to market’s horizontal moves soon and Shanghai Composite Index to test the 4,000 point level, a near six-year high. Haitong Securities said the rest of the year is “full of opportunities” and is set for a new high.
The 10-year cyclically adjusted price-to-earnings ratio is at a 5% discount to its 15-year average, making it a safe place to reposition in China equities, Societe Generale analysts wrote in a recent note. The CSI consumer staples sub-gauge, which was earlier the most expensive part of the market, now trades at 32 times forward PE, compared to over 36 times at its peak in February,
according to Bloomberg data.
Not everyone is excited. Last week’s advance in CSI 300 was driven by a single-day surge. The gauge retreated as foreign investors ended a buying spree after nation’s central bank signalled yuan’s recent gains have been too fast. Guan Tao, former official of State Administration of Foreign Exchange, said in an interview with China Securities Journal that yuan appreciation is not necessarily a bullish factor for Chinese A-shares as mainland exporters are under pressure from the currency’s rally.
“We’re not going to get ahead of ourselves and get overly excited, there isn’t enough logic to support a strong rally,” said Shine Gao of Taicheng Capital Management Co., who plans to lower the exposure he added two weeks ago if gains progress. “Opportunities are likely to be highly structural or thematic.”
Any sustained rallies will also be without the frenzied sentiment of last year when excessive liquidity from pandemic relief efforts fuelled a near 38% jump in four months.
“A wild rally like the kind we saw last year shooting up in a straight line benefits no one and is the last thing authorities want to see right now,” said Shanghai Xiejie Asset’s Lin.
“After the full moon begins the waning, as the saying goes, and they want to prevent that.”