Chinese Policymakers Introduce Stimulus Measures

Chinese policymakers recently implemented various monetary, fiscal, and equity market stimulus measures, resulting in a 28% surge in the FTSE China A50 index over the past two weeks. This has led some investors to speculate whether the opportunity for investment has already passed.

HSBC strategists, however, believe it’s still not too late to invest and have upgraded the mainland China market to Overweight.

Historical Context

A review of 30 historical rallies in the FTSE China index, dating back to 2005, indicates that rallies exceeding 10% typically last around 76 trading days, with average gains of about 38%. Notably, in at least 25% of these instances, increases have approached 60%.

Chinese valuations remain attractive, trading at an 18% discount compared to historical emerging market valuations of 5%. According to strategists, “Our machine learning valuations model also suggests that mainland China is still 15% undervalued based on fundamentals.”

Currently, investors are underweight on mainland China by 230 basis points, placing them in the bottom 10th percentile relative to historical benchmarks. This indicates the potential for future inflows into the market.

Sector Preferences

From a sectoral perspective, HSBC strategists favor growth sectors such as consumer discretionary and information technology, along with beneficiaries of state-owned enterprise reforms, including telecoms and high-dividend yield stocks.

While the recent stimulus is a positive sign, sustained policy support in the months ahead will be crucial for altering investor sentiment, according to the investment bank. Since 2021, there has been a lack of follow-through—especially concerning fiscal policy. Nevertheless, HSBC suggests that policymakers’ tone may differ this time.

Risks Ahead

HSBC cautions that the rapid pace of the current market rally may not be sustainable and a pullback could occur before momentum stabilizes at a slower pace. Another risk factor includes the upcoming U.S. elections, particularly concerns regarding potential tariffs, such as Trump’s proposed 60% tariff on Chinese imports.