The Wall Street chorus of "Buy China" calls is growing louder

(Bloomberg) — A bullish consensus on Chinese stocks is emerging on Wall Street, with newfound optimism around President Xi Jinping’s policies and an epic rally in stocks in November prompting some major banks to retreat from longtime bearish views.

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Morgan Stanley, known for its cautious outlook, raised its targets for the country’s stock benchmarks last week, expecting the MSCI China Index to rise 14 percent by the end of next year. Bank of America Corp. turned tactically positive on China, where some key equity gauges lost more than a third of their value in the year to October, making them the world’s worst performers.

JPMorgan Chase & Co. moved even faster, calling the market crash late last month a buying opportunity, breaking away from the bank’s “uninvestable” label on Chinese internet firms earlier this year.

READ: Everything suddenly went right for China’s stock market

Boosting confidence among sell-side analysts have been surprise policy changes in recent weeks, from an easing of tight Covid controls to stronger remedies for real estate woes and efforts to improve ties with the US. The moves revived market enthusiasm after the $6 trillion debacle that culminated at last month’s Communist Party congress, where Xi’s unprecedented power grab sparked fears that ideology would trump pragmatism.

Chinese markets have reached “the kind of valuation discount that we thought would be characterized by a really bearish scenario. So now with the gradually more positive news flow, it could start to do better,” Jonathan Garner, Morgan Stanley’s chief Asia and emerging markets equity strategist, said in an interview last week. The bull market could last for quarters, he added.

China’s MSCI index jumped nearly 24 percent this month, eyeing its best performance since 1999 after losing 17 percent in October. The Hang Seng China Enterprises Index of Hong Kong-listed Chinese stocks and the NASDAQ Golden Dragon China Index are also in bull market territory, defined by a 20% bounce from recent lows.

READ: China stocks enter bull market on Covid, property moves

The latest rally may have legs if China’s exit from Covid Zero continues and its economy continues to recover, according to Laura Wang, chief China equity strategist at Morgan Stanley. “I don’t think he has yet fully appreciated all the benefits of the full reopening, the recovery of consumption, the macro stabilization and the restoration of job opportunities.”

Garner and his team correctly predicted a deepening rout in emerging markets and China earlier this year.

High hopes

Many of Wall Street’s big banks were upbeat about China’s entry into 2022, touting easing regulatory hurdles on technology, pro-growth economic policies and attractive valuations. Goldman Sachs Group Inc., for example, expected double-digit gains in Chinese stocks this year.

However, the punitive Covid lockdown, the housing slump and the risk of a potential delisting of dozens of domestic US firms have sparked a relentless sell-off.

After the market saw a remarkable recovery this month, Goldman Sachs predicted a further rally. Both the MSCI China index and the CSI 300 index will rise 16% over the next 12 months, the most in Asia, strategists including Timothy Mo wrote in a note last week.

READ: Fund titans buy Chinese shares on bets the worst is over

Global funds have bought about 41 billion yuan ($5.8 billion) of Chinese stocks onshore so far this month through trading links with Hong Kong. This follows net outflows of 57.3 billion yuan in October, the largest since March 2020.

“Real Buy”

Still, several market watchers said the implementation of policies announced by Chinese authorities is the key thing to watch for in the next few months. Therefore, it remains to be seen whether bullish sentiment from sell analysts will lead to sustained flows from real-money investors.

The resurgence of Covid cases is already tempering expectations of major changes to the Covid Zero strategy.

JPMorgan Asset Management sees some US institutional investors continuing to shift funds from China to other emerging markets due to challenges and uncertainty surrounding domestic politics, Taiwan and tensions with the US.

The recent rally has been driven in part by speculators reversing a wave of bearish bets, said Julien Lafargue, chief market strategist at Barclays Private Bank. “We haven’t seen the real buying in China yet and I think people will want to see evidence of a reopening, better economic data coming out of China before they make that move.”

READ: Market hopes for China Covid Pivot may have gone too far: CLSA

“Game Changer”

Meanwhile, November’s surge saw China’s offshore shares, which suffered more during the long slide, bounce back stronger than their peers in Shanghai or Shenzhen.

Analysts say the most profitable bets are likely to be among stocks in Hong Kong and New York, as they remain much cheaper than peers on the mainland. Their greater exposure to the consumer sector – which is seeing strong pent-up demand – is also seen as an advantage. Last week, Morgan Stanley closed its preference for onshore stocks.

The Hang Seng gauge of Chinese shares in Hong Kong is still down almost 26% this year. The CSI 300 climbed 8.4% in November, paring its loss since 2022 to 23%.

A recalibration of Covid policies and property measures “could be a game-changer for the challenging offshore Chinese market,” analysts at HSBC Holdings Plc, including Raymond Liu, wrote in a recent note.

READ: Cheap Hong Kong stocks are hot picks for China Bulls: Inventory

–With assistance from Henry Wren and Abhishek Vishnoi.

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