China Stocks Outshine S&P 500, Wall Street Optimistic

Key Takeaway

• China's stock market outperforms S&P 500 with MSCI China index and KraneShares CSI China Internet ETF up 9% and 13%, respectively.
• Analysts from Bernstein, BNP Paribas, JPMorgan, and Goldman Sachs optimistic about further growth due to pro-growth policies and sector opportunities.
• Investment strategies favor selective stock-picking in large-cap stable growers, high yielders, and sectors like AI and EV batteries.

China's Stock Rally Surges

China's stock market has experienced a significant rally, outperforming even the S&P 500 this year. The MSCI China index has seen an approximate 9% increase, while the KraneShares CSI China Internet ETF has risen about 13%, compared to the S&P 500's 8% gain. This rebound follows a challenging period where Chinese markets faced nearly $5 trillion in losses over three years due to factors like the property debt crisis and slowing growth.

Policy and Market Dynamics

Analysts attribute the rally's sustainability to China's policy environment. Bernstein, in a May 3 note, highlighted the silent bull cycle in the Chinese market, with the MSCI China index up 19% since January despite skepticism. They see more room for growth, particularly in growth stocks, while advising selective momentum hedging. BNP Paribas and JPMorgan have also expressed optimism, citing China's pro-growth and pro-reform policies, and the potential for certain sectors to benefit from the recovery. Goldman Sachs noted that China's A-shares could jump around 20% with improvements in shareholder returns, corporate governance, and institutional investor ownership.

Risks and Opportunities

Despite the positive outlook, there are risks to consider, including the timing and effectiveness of policy rollouts and the recovery pace of the economy, property sector, and earnings. Nomura views the recent Politburo event as a positive signal for stocks, suggesting that underweight investors might join the rally, with cyclical recovery stocks expected to outperform.

Investment Strategies

Investors are advised to be selective in stock-picking. Goldman Sachs identified "large-cap stable growers" with high earnings growth rates, low volatility, and strong balance sheets. JPMorgan's picks include high yielders and growth picks in sectors like artificial intelligence and electric vehicle batteries. For U.S. and international investors looking to invest in China through ETFs, options include the SPDR S&P China ETF, iShares MSCI China A ETF, Global X MSCI China Consumer Disc ETF, and iShares MSCI Hong Kong ETF.

Street Views

• Bernstein (Neutral on China market):

  "Chinese market has seen one of the most silent bull [cycles]; MSCI China up 19% since Jan bottom despite skeptical investors. With rebounding strength in recent weeks, many investors question if this rally can continue or is it already time to take profit."

• BNP Paribas (Bullish on MSCI China):

  "It’s increasing its MSCI China target 'to the bullish scenario' to have another 10% to 15% upside."

• JPMorgan (Bullish on capable leaders across sectors in China):

  "We see the current uneven recovery broadening to benefit capable leaders across sectors that have yet to participate or fully participate in the ongoing rally."

• Goldman Sachs (Bullish on A-shares and high-quality development focus by Chinese policy):

  "Its analysis suggested that China’s A-shares could jump around 20% — if China can 'narrow the gap' with the international average in terms of shareholder returns, corporate government standards and institutional investor ownership."

• Kevin Liu, CICC Research:

  "More direct and to-the-point fiscal stimulus measures targeting the demand side are key in keeping the rally going forward."

• Nomura (Cautiously Optimistic on Chinese stocks post-Politburo event):

  "The Politburo event is 'clearly positive' for stocks. We think underweight investors are likely to be forced to chase the rally," adding that beaten-down cyclical recovery stocks are likely to outperform.