By The recent surge in Chinese stocks hit the pause button on Tuesday after Beijing failed to roll out another large stimulus package, a surprise to investors hoping to add more fuel to the unprecedented rally.
Hong Kong’s benchmark Hang Seng Index (^HSI), which is loaded with large Chinese stocks, dropped around 9% on Tuesday, its worst day since October 2008, after climbing around 20% over the past month on the heels of China unleashing its most aggressive monetary stimulus since the pandemic.
China’s benchmark CSI 300 (000300.SS) also experienced a volatile day as expectations of a large stimulus announcement fueled an initial 10% rise after markets reopened from the country’s weeklong holiday. The index later gave up those gains, finishing the day up a more modest 6%.
The stimulus, an effort by China to course-correct its struggling economy, was first announced on Sept. 24. Since then, a surge of inflows has dramatically boosted Chinese equities, particularly in real estate and consumer staples, as investors bet on Beijing’s comeback.
But Wall Street remains split on whether or not now is the right time to buy into the market.
“The short-run pop [signals that] people are feeling better,” Jeremy Schwartz, chief investment officer at WisdomTree, told Yahoo Finance’s Market Domination. “Will it be enough to move their economy? That’s very much an open question [because] the sentiment was so, so negative.”
Goldman Sachs added to bullish commentary in a note on Monday titled “China strategy: if not now, when?” The team, led by analyst Kinger Lau, upgraded China stocks to Overweight from Marketweight and argued for potential upside between 15% and 20% for both the MSCI China Index (2801.HK) and CSI 300 Index.
Other big banks, including HSBC Holdings and BlackRock, also upgraded mainland Chinese stocks in recent days, building on expectations that the rally still has more room to run.
“Many China watchers may have suffered ‘policy fatigue’ over the past 1 to 2 years, with the policy delivery in the post Covid-era generally being perceived as underwhelming,” Goldman Sachs wrote in its report. “Given low market expectations, the latest easing package has positively surprised investors and altered the policy narrative along a few dimensions.”
The analyst team added, “More stimulus is probably needed to turn things around, but the profit outlook [for Chinese companies] has moderately improved,” with valuations still below historic averages amid depressed stock prices.
“Even if the rally falters, [Chinese equities] still have a place in investor portfolios,” the report read.
As investors look ahead to the next possible catalyst for Chinese stocks, analysts say positive momentum will likely hinge on the magnitude and execution of more fiscal policy, rather than just monetary support.
“A well-targeted fiscal stimulus, aimed at rejuvenating the property sector and reviving animal spirits, could significantly improve China’s economic prospects, potentially generating positive spillovers for the global economy,” Seema Shah, chief global strategist at Principal Asset Management, wrote in a note on Monday.
“While investors have reason for cautious optimism, much will depend on the size and implementation of the various measures, details of which are still pending.”
Alexandra Canal is a Senior Reporter at Yahoo Finance. Follow her on X @allie_canal, LinkedIn, and email her at [email protected].
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