China’s equity markets have seen significant volatility in 2024, with a derivative-induced meltdown in January causing stocks to plummet. However, since February, there has been a rally in Chinese stocks, with the KraneShares CSI China Internet ETF and the KraneShares MSCI China A 50 Connect Index ETF outperforming the S&P 500 and Nasdaq 100. This rally has raised questions about its sustainability, and five key points have been compiled for investors to consider why this breakout may be different from previous rallies.
One key reason for the recent strength in Chinese stocks is the government’s active involvement in buying Mainland stocks to stabilize the market. State-linked entities, such as Central Huijin Investments, have announced purchases of Mainland China-listed ETFs and increased holdings of Mainland bank stocks. This public display of support from the government has helped boost investor confidence and influence stock market indices.
Another factor contributing to the positive sentiment in Chinese equities is the return of global investors. Following a period of underweights or neutral positions in Chinese stocks, investors from the US, Europe, and Asia are gradually reallocating to China’s equity market. This trend is expected to continue as Chinese investors have already started returning, followed by Asian investors, and potentially European and American investors.
Furthermore, new policies issued by the State Council to improve China’s capital markets, encouraging dividends, corporate governance, and investment in equities, have also had a positive impact on investor sentiment. Additionally, China’s economy is showing signs of improvement, with Q1 2024 GDP exceeding estimates and consumer confidence slowly increasing. The government’s support for consumption, coupled with incremental policy changes, has also boosted optimism about the economy.
In terms of valuations, Chinese equities are currently trading at attractive levels, with many companies actively buying back their stock in the internet sector. This, combined with improving earnings expectations for internet companies, could drive further outperformance in certain sectors. The combination of state-linked support, global investor interest, shareholder-friendly policies, economic recovery, and attractive valuations suggest that the current rally in Chinese stocks may have a strong foundation for continued growth.
Investors looking to capitalize on the potential growth in Chinese equities may consider focusing on mega-cap stocks available through the Northbound Stock Connect program or top internet companies. The KraneShares MSCI China A 50 Connect Index ETF and the KraneShares CSI China Internet ETF provide exposure to these segments of the market. Overall, the outlook for China’s equity market looks positive, with various factors aligning to support continued growth in the near term.
