Wells Fargo: Chinese Equities 'Running Ahead of Reality'

Wells Fargo strategists express skepticism over the recent rally in Chinese stocks, noting that the MSCI China Index surged nearly 40% from September 9 to October 7, 2024, due to positive economic and policy announcements. Despite this surge, they warn that this may represent “another false dawn” for the Chinese economy, which still struggles with a prolonged property crisis.

Key Concerns

• Consumer Recovery: The time required for consumers to recover from property-related financial issues.
• Population Decline: A decreasing population poses long-term challenges.
• Regulatory Uncertainty: Continued uncertainty in regulations affects investor confidence.
• Government Debt: High levels of debt present additional risks.
• Global Trade: Rising protectionism could hinder export growth, particularly with potential changes in U.S. trade policy due to upcoming elections.

Investment Recommendations

Wells Fargo suggests investors seize the recent rally to reduce exposure to Chinese and Emerging Market Equities. Instead, they recommend focusing on U.S. Large Cap Equities and sectors like Energy, Communication Services, Financials, Industrials, and Materials to seek opportunities amidst election-related volatility.

Market Trends

Despite the positive trend in the MSCI China Index, it is considered “incredibly overbought.” Potential support levels are identified at the 50-day moving average (58.85) and the 200-day moving average (57.05), while resistance lies near the mid-2022 to early-2023 high of 76.

Current Market Performance

Recent economic data showed declines in Hong Kong and Chinese stocks:
– Hang Seng Index: Fell 3.7% to 20,318.79.
– Hang Seng TECH Index: Decreased by 4.7%.
– Shanghai Shenzhen CSI 300 Index: Lost 2.7%.
– Shanghai Composite Index: Down 2.5%.

China's exports grew only 2.4% year-on-year in September, the slowest since May. Additionally, new loan issuance by commercial banks was 1.6 trillion yuan, below forecasts of 1.9 trillion, indicating sluggish domestic demand for credit.