Bottomed-out? Chinese stocks make a comeback as key indicators turn positive

Chinese stocks have posted some of the strongest gains in years as sentiment around China’s economy and its fiscal and monetary policy settings shifts positive.

5 straight weeks of gains for the important CSI 300 index, and a US$1.7 trillion year-to-date bounce in Chinese stocks are some of the key headline figures indicating a turning point.

However, perhaps more telling is the fact global institutional investors are returning.

According to a HSBC report, US$8.4 billion of offshore investors’s capital moved into Chinese mainland stocks in February, marking the end of a capitulation in foreign investment in Chinese equities.

“The China stock market was among the best performers in February. Key to that strength was that targeted state support measures — the latest of which was a surprise cut in the 5-year loan prime rate — are finally gaining traction,” said the HSBC Asset Management report.

Technicals suggest its time to buy Chinese stocks

Michael Gayed, the Publisher of The Lead-Lag Report, defined the recent bounce as “tradable”

“There’s a price for everything, and at some point, Chinese stocks do become screaming buys. When I look at multiple ETFs and individual stocks, it does seem like we could be in a tradeable bounce here,” he said.

However, Gayed also warned a Donald Trump presidential victory in the United States could negatively impact Chinese stocks.

Chinese stocks
The February bounce in China’s SSE Composite Index (Image: Carl Capolingua)

Analyst Carl Capolingua has also highlighted bullish technical indicators underpinning the recent Chinese stocks surge.

“From a technical perspective, the rally is starting to look like more than just a bounce,” he said.

“The short term trend has swung back to up and it’s also providing dynamic support to price, and the price action is back to rising peaks and rising troughs. Both factors imply a shift in market sentiment to a ‘buy the dip’ mentality – which is completely at odds with the prior “sell the rally” mentality.”

Despite the increasingly buoyant mood surrounding Chinese stocks, headline valuations remain at levels not seen since the 1997 Asian Financial Crisis.

Some of the biggest large cap Chinese stock market gainers year-to-date include:

  • CNOOC Ltd (HKG: 0883) +34%
  • PetroChina (SHA: 601857) +27%
  • Contemporary Amperex Technology (SHE: 300750) +18%
  • China Shenhua Energy (SHA: 601088) +17%
  • Agricultural Bank of China (SHA: 601288) +14%
  • BYD (SHE: 002594) +12%
  • Wuliangye Yibin (SHE: 000858) +12%

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