Chinese equities: a sustainable rally?

After the sharp falls in January, market sentiment towards Chinese equities seems to be gradually improving. In general terms, there are several factors underpinning this improvement and reinforcing the recovery of the Asian giant:

• Better than expected macroeconomic performance in the first quarter, including very positive travel figures due to the Chinese New Year holidays, as well as better than expected credit growth, exports and PMI figures.
• Better than expected business results in the fourth quarter of 2023 and in the first quarter this year.
• More diplomatic talks between the US and China, including the recent meeting between US Secretary of State Antony Blinken and Chinese President Xi Jinping.
• Stricter regulations to protect and enhance shareholder returns in China at home: the new ‘nine-point guideline’ issued by the State Council to strengthen supervision, prevent risks and promote capital market development.

The recent rally in Chinese equities looks more like a technical rebound, given the current cheapness of the market, with valuations at historic lows, but its sustainability will depend on the earnings outlook for the rest of the year. So far, companies seem optimistic.

We continue to focus on companies with higher earnings visibility and those that can increase payouts and buybacks, including public and private companies; indeed Internet companies have made quite a few buybacks so far this year.

For confidence in China to improve significantly, in a context of increasing monetary policy accommodation, further support through higher than expected fiscal spending and additional help to the property market would be needed; that said, the last national congress made it clear that the government intends fiscal support to be disciplined.