How to Capitalize on the Ongoing Bull Market for Chinese Stocks

In the last week of September, the Chinese stock market experienced a strong rebound, with Chinese assets globally rising across the board. From September 23 to September 30, the Hang Seng Index rose by 15.75%, and the Nasdaq Golden Dragon China Index increased by 24.5%, significantly outperforming global markets. Among the top ten Chinese stocks in terms of gains over the past five trading days were Lexin (LX), Lufax Holding (LU), Dada Group (DADA), Bilibili (BILI), TAL Education (TAL), Up Fintech (TIGR), Gaotu (GOTU), Noah Holdings (NOAH), JinkoSolar (JKS), and Boss Zhipin (BZ), with increases ranging from 36.37% to 62.87%, showcasing impressive performance.

This sudden stock market surge is primarily attributed to a flurry of favorable policies from China, injecting confidence into the market. So, how much upside potential remains in this bull market? How can we seize investment opportunities during this bull run?

From the current market performance, it is evident that the Hong Kong stock market exhibits greater flexibility. This is mainly due to the strong profitability of Hong Kong companies, which are valued at low levels. Additionally, the Hong Kong market is more sensitive to potential interest rate cuts by the Federal Reserve, leading to quick capital reactions that pushed the Hang Seng Index up to 21,133.68 points, nearing the early 2023 peak. In terms of industry sectors, interest-rate and policy-sensitive sectors performed the best, with real estate agencies, investment and asset management, and securities and brokerage leading the way with gains of 55.12%, 50.55%, and 44.58%, respectively.

In addition to the catalyzing effect of favorable policies, the "fear of missing out" (FOMO) has also contributed to the stock market's surge. The heightened market sentiment has led to an overly rapid response, resulting in technical indicators showing signs of "overextension." For instance, the six-day Relative Strength Index (RSI) of the Hang Seng Index reached 97.182, the highest level since the end of 2018, while the Shanghai Composite Index and the Nasdaq Golden Dragon China Index reached 97.064 and 88.358, respectively, indicating "overbought" conditions in the short term.

Next, we will analyze the potential for further gains in the current bull market from the perspectives of policy, sentiment, and capital flow.

This bull market has primarily benefited from favorable policy support, and with more policy measures expected to be introduced, there is still potential for the stock market to rise further. The core changes in this round of policies focus on encouraging the private sector to leverage more, especially in the stock and real estate markets, while also emphasizing livelihood and consumption. Future potential policy measures may include relaxing purchase restrictions, lowering existing mortgage rates, increasing subsidies for second-child births, and issuing consumption vouchers.

The Hang Seng Tech Index has risen to 21,133.68 points, with optimistic sentiment approaching the early 2023 post-pandemic peak (22,700.85). Thus, in the short term, market sentiment is running ahead of itself, with expectations already priced in, and technical indicators suggest a potential "overbought" condition.

From the capital flow standpoint, the current market is dominated by trading and passive funds, while long-term capital has not significantly flowed in.

(1) Trading and passive funds are leading: Currently, trading funds such as hedge funds are reacting quickly and are highly active, similar to previous market peaks. Additionally, increased inflows of passive funds indicate that more retail investors are entering the market, driving up major stocks.

(2) Long-term foreign capital has not significantly flowed in: Data shows that long-term foreign investments are still flowing out. Many long-term investors are choosing to reduce their positions to avoid being adversely affected during the market rebound, rather than significantly increasing their holdings.

3.Investment Strategies for the Bull Market

In the current market environment, investors can focus on the following directions in the short term:

1. Short-term Focus: Stocks of central state-owned enterprises trading below book value and previously oversold sectors (such as internet software, food retail, and medical service equipment) remain key areas for market rebound speculation.

2. Cyclical Sectors: If subsequent policies are implemented and fiscal measures exceed expectations, cyclical sectors (such as consumption, the real estate chain, and non-bank financials) are likely to present performance opportunities.

3. Interest Rate-Sensitive Growth Stocks: Continue to pay attention to growth stocks that are sensitive to interest rates, such as those in internet technology and biotechnology.

In summary, the strong market rebound in the last week of September is a result of the combined effects of policy support and market sentiment. Despite facing short-term technical overbought risks and challenges in policy implementation, investors can still seize market opportunities by focusing on undervalued sectors, cyclical stocks, and growth stocks. Additionally, maintaining close attention to policy dynamics will help in making more informed investment decisions amid future market fluctuations.