NVDA
NVIDIA
-- 110.570 AVGO
Broadcom
-- 179.450 TSLA
Tesla
-- 263.450 PLTR
Palantir
-- 80.460 MRVL
Marvell Technology
-- 72.280 
How Much Room is There for Valuation Recovery in China-Linked Stocks?
After experiencing significant declines and valuation pressures over the past two years, Chinese assets have seen impressive gains this week, driven by a package of macroeconomic stimulus policies.
According to a report from Goldman Sachs, market participants have responded positively, with Chinese stocks recording the largest single-day net inflow since March 2021 on Tuesday. Additionally, the open interest for call options on the iShares China Large-Cap ETF (FXI) surged to its highest level in a decade.
Furthermore, Goldman Sachs reports that hedge funds' overall and net allocations to Chinese stocks remain at their lowest levels in five years. All these indicators suggest that the rebound in this sector might not yet be over.
Background of the Rebound: Extreme Low Valuations
Over the past couple of years, due to geopolitical risks and macroeconomic downturns, global institutions have drastically reduced their exposure to Chinese assets. Many hedge funds have even taken short positions, resulting in Chinese assets being driven to extremely low valuations.
The following two charts illustrate the low allocation of Chinese assets compared to the past five years, as well as the crowded short positions on Chinese stocks, second only to long positions in U.S. tech stocks.
In terms of valuation, taking the MSCI China Index as an example, after two years of valuation（PE） expansion in 2020 and 2021, it has been on a downward trend, reaching around 10 times earnings just before the rebound in Q3 2024.
When comparing the price-to-earnings ratios (P/E) of the MSCI China and S&P 500, it's evident that, while U.S. stock valuations have continued to expand, the ratio between the two indices has decreased significantly, hitting around 0.42 before the latest rebound.
From a global perspective, the valuation of Chinese concept stocks is also at a low point.
Marginal Improvements in Earnings and Valuation: Davis Double Play?
Using the MSCI China Index again as a reference, we can see that the Bloomberg expected EPS for this index has remained stagnant in recent years, contrasting sharply with the rising expected EPS for the S&P 500 index.
However, after the U.S. opened up space for monetary policy, China's recent actions on Tuesday, including lowering reserve requirement ratios, interest rates, and the rates on existing mortgage loans, have led to an improved expectation for China's macroeconomic fundamentals. As a result, the profit expectations for Chinese assets are also likely to improve, which may break the current extremely low valuations.
For example, sectors such as consumer goods and the internet, which are sensitive to consumer spending, are likely to see optimistic earnings improvements due to reduced mortgage burdens on households, encouraging more spending in these areas. Therefore, the rebound in these two sectors has been quite noticeable recently.
Future Focus: China's Fiscal Policy, Fed Rate Cut Pace
Institutions generally believe that the policy measures introduced on Tuesday are just the starting point, with expectations for more actions to come. While the current market rebound is responding positively, sustaining this momentum and mitigating long-term risks will require further coordination of fiscal and structural policies.
Bank of America notes that the long-term performance of the stock market will depend on further fiscal stimulus and the advancement of structural reforms. A genuine economic recovery will necessitate not only more aggressive fiscal expansion but also the resolution of structural issues such as overcapacity and deflationary pressures. Furthermore, the sustainability of the market rebound depends on improvements in corporate earnings and macroeconomic fundamentals, particularly concerning the real estate sector and financing conditions for small and medium-sized enterprises.
Returning to monetary policy, with most central banks globally moving toward rate cuts, there remains potential for further easing in China. HSBC predicts another 10 basis points cut in interest rates and a 50 basis points reduction in reserve requirements for this year.
However, there are concerns that substantial economic stimulus in China could lead to inflation in commodities, potentially slowing down the pace of inflation decline in the U.S. and affecting the Fed's rate-cutting timeline, which represents a risk factor for investors to consider.
Disclaimer: Moomoo Technologies Inc. is providing this content for information and educational use only.
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KK momo : Chinese market strong rebound
Panda busy KK momo : China is hiding a youth unemployment rate of nearly 25%. I don’t think this is the beginning of a bull market.![[undefined]](https://static.moomoo.com/nnq/emoji/static/image/default/default-black.png?imageMogr2/thumbnail/36x36 "undefined")
delavie Panda busy : wow... so high?
103286208 : ok
104065181 : Chong Ah!
104838493 : China is very conservative on economic stimulation in view of the high population. Everyone's spending will cause the inflation rise in the rocket .Heard that the Huawei 3 folds new hp selling more than rmb40k , how many can afford to buy it?
suffian bin amat : $GRN HOLDING CORPORATION (GRNF.US)$
KWONG8888 : good
Northsea9 : This policy adjustment will continue for a very long time, that is, the current rebound will last for more than a few years. This is a full recovery after complete stabilization of the regime. It is likely that it will enter a new giant bubble in 5 to 8 years!
104704843 Panda busy : question is if that is the worst it is already, or it will rebound, some will say it will not, but with low interest and strong stimulus, jobs will also rebound in my opinion.
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