Chinese stocks, which have withstood the epic wild swings in global financial markets, have once again emerged on investors’ and analysts’ radars as they reassess the outlook for the world’s second-largest market.
The volatility of most major markets in Asia hit multi-year highs heading into August, but the 10-day realised price swing on the CSI 300 Index reached a five-month high before quickly subsiding, according to Bloomberg data. The volatility on Japan’s Nikkei 225 surged to a level not seen since at least 2014, while rising to more than four-year highs for the MSCI Asia-Pacific Index and South Korea’s Kospi, the data showed. The VIX index, Wall Street’s fear gauge, surged by the most since 1990 this week.
Mainland stocks’ relatively subdued reaction to the global storm may help boost the appeal of the US$8.4 trillion yuan-traded market that is grappling with waning confidence among investors and an economic slowdown, according to analysts. Smart money may have already flowed into Chinese stocks, with a Goldman Sachs report showing global hedge funds added to their exposures last month, albeit slightly.
“Chinese equity markets will likely relatively outperform,” said Gary Dugan, CEO of The Global CIO Office in Dubai, which provides services to family offices, wealth managers and ultra-high-net-worth individuals. “We suspect the leadership will be even more focused on supporting domestic demand now that the US economy appears at risk of slowing more sharply than previously anticipated.”
A Politburo meeting chaired by Communist Party boss Xi Jinping last week dispelled some gloom in the market by signalling more measures to stimulate short-term growth and support household consumption. That to some extent countered the fallout from the global tumult sparked by jitters about a US recession and an unexpected monetary policy tightening by Japan’s central bank.
The daily movement on the CSI 300 has remained below 2 per cent every day this month, unlike massive gyrations in other Asian markets, according to Bloomberg data. The Nikkei tumbled by a record 12 per cent on Monday before rebounding 10 per cent the next day. The Kospi recorded a swing of about 12 per cent on the first two days of this week, with the decline reaching almost 9 per cent on Monday.
“The weakening momentum for Japanese and US equities will propel investors to unwind their positions and move some money back to Chinese stocks,” Patrick Pan, analyst at Daiwa Securities Group in Hong Kong, said in a report this week. “Attractive market valuations will provide a buffer for Chinese equities amid the global market rout.”
The equity risk premiums for both the CSI 300 Index and the Hang Seng Index rebounded to a “bonanza zone”, trading between one and two standard deviations above the average over the past decade, he said.
A weakening US dollar, expected on the back of a likely Federal Reserve rate cut next month, is set to further benefit Hong Kong stocks, whose correlation with the dollar index has remained negative over the past six years, Pan said. Investors should rebuild positions in Hong Kong stocks if the Hang Seng Index drops below 16,000, he added. The index closed at 16,877.86 on Wednesday.
China’s relative isolation from the global turmoil is also attributed to its restrictions on overseas investors, whose investments in onshore stocks are subjected to quotas set by the financial regulators.
“The ripple effect from overseas to the A-share market is expected to be limited, because of low valuations and expectations about an improvement in fundamentals and liquidity from the policy support,” said Zhu Jinjin, an analyst at China Dragon Securities in Beijing.
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