China Consumer and Tech Stocks Surge: How Long Will the Rally Last?

On September 24, China's central bank and regulatory commissions announced major policies at a State Council press conference. These included lowering existing housing loan interest rates, reducing reserve requirements, boosting equity funds, and facilitating long-term market investments.

In response, Chinese stocks surged. The triple-leveraged China Large Cap ETF jumped 30% in one day, drawing market attention. The Nasdaq Golden Dragon Index of China also saw its biggest gain in two years.

Smart Money Bets on Chinese Stock Rally

Chinese concept stocks have seen a strong surge this month, particularly in sectors such as consumer discretionary, internet, and brokerage, which have experienced steady gains over several days. Leading the pack is NIO.US, which has recorded a nearly 50% increase for the month, underscoring the impressive performance of these sectors. This rise in key industries reflects improving investor sentiment and confidence in China's market recovery and future prospects, especially as the country continues to implement supportive economic policies.

The presence of "smart money" from U.S. investors adds another layer of significance to the rally. Many institutional investors and hedge funds have been strategically positioning themselves in these Chinese stocks, signaling a belief in sustained growth and profitability. This influx of capital suggests that market players see long-term potential, driven by favorable economic trends and policy support from the Chinese government. These moves are seen as key indicators of where the market might head in the coming months, hinting at further momentum for Chinese equities.

Surge in Chinese Concept Stocks: How Long Will This Trend Last?

Behind the surge in Chinese concept stocks in this wave, there are actually a series of catalysts at play. In terms of overseas factors, the significant rate cut by the Federal Reserve had a notable short-term boost on the trend of risk assets such as stocks, leading to a 4% increase in the Chinese concept index after the September 18 interest rate meeting. Furthermore, yesterday, a slew of favorable domestic policies were introduced, with reserve and rate cuts expected not only to drive domestic economic development but also to inject incremental funds into the stock market, causing the Chinese concept index to skyrocket 9% overnight.

In addition, the appreciation of the renminbi and the long-term undervaluation of Chinese assets may both serve as important drivers for the influx of overseas funds into Chinese concept stocks. It is widely believed that the rise in the renminbi exchange rate will further enhance the attractiveness of Chinese assets, attracting more global funds to flow in.

In addition, the Chinese stock market has long been at a low valuation. With the gradual improvement of domestic company performance, high-quality leading Chinese concept stocks may undergo value reassessment. According to statistics from Kaiyuan Securities Research, the current valuation of some e-commerce leading enterprises is only around 8 times, less than 9 times. While the valuations of some comprehensive internet companies or technology Chinese concept stocks have reached 15 times. Compared to overseas markets, such as Nvidia and other M7 companies, the PE ratios of these Chinese concept stocks are indeed lower. If the US cuts interest rates in the future, long-term funds will reallocate assets.

Meanwhile, despite the gathering favorable factors, foreign capital is still significantly underweight in Chinese assets. Industry insiders have told domestic media that hedge funds' allocation to the Chinese stock market is only 6.8%, hitting a five-year low, lower than in February this year and about 1% lower than the peak in April-May. There is still a lot of room for increased shareholding.

However, with recent favorable policies coming out frequently, Wall Street investment banks have also voiced their optimism, actively bullish on China's capital markets and Chinese concept stocks. Bank of America pointed out that a series of measures launched yesterday will immediately provide liquidity to the market. Furthermore, if the market performs well and lasts long enough, it will further promote the return of individual investors and overseas investors, helping to stabilize the market.

The latest interpretation by analysts at JPMorgan Chase believes that the comprehensive stimulus measures introduced by the central bank on Tuesday are the most extensive loosening policy since 2015. Currently, the short-selling ratio in the Hong Kong market (as a percentage of turnover) has dropped from 15-22% last week to 13.6% on Tuesday, lower than the average level since 2016, indicating that a large amount of short positions have been covered.

Additionally, according to investor feedback, due to the lackluster performance over the past four years, many global investors have reduced their holdings of Chinese assets. However, they are willing to return when the timing of stimulative policies is right. Overall, the current policy-driven market rebound is evident, but further fiscal stimulus and further coordination of structural policies will be needed in the future.

How to Deploy in the Chinese Concept Stock Market Before the Breakout?

Yesterday, Hong Kong stocks and Chinese concept stocks collectively surged. Some media outlets pointed out that overseas hedge funds' funds may be the main force of foreign inflows. Looking at the list of top gainers, industry preferences for funding are quite obvious, including - consumer, high dividends, and internet.

JPMorgan suggests focusing on the real estate, discretionary consumer, and materials sectors, especially companies benefiting from lower down payments and mortgage rates, such as KE Holdings (BEKE.US) and JD.com (JD.US). In addition, leading companies in the education sector, such as $$TAL Education (TAL.US)$$, may see their market position become more solid after industry integration.

Tianfeng Securities said that compared with the global market, Chinese assets are still cost-effective. Based on the expectation of gradual recovery and subsequent improvement in fundamentals, the current Hong Kong-listed Chinese stocks are still attractive in valuation and have a high risk-return ratio. In terms of Chinese stocks, the institutions have given the following suggestions on the focus and targets:

1. Internet platforms: including $Alibaba (BABA.US)$Please use your Futubull account to access the feature.$Bilibili (BILI.US)$Please use your Futubull account to access the feature.$PDD Holdings (PDD.US)$ Wait.

2. New energy vehicle startups: including $Li Auto (LI.US)$Please use your Futubull account to access the feature.$XPeng (XPEV.US)$ Wait.

3. New consumer trends: including $POP MART (09992.HK)$Please use your Futubull account to access the feature.$MINISO (MNSO.US)$Please use your Futubull account to access the feature.$Luckin Coffee (LKNCY.US)$ Wait.

4. OTA & travel: such as$Trip.com (TCOM.US)$ , as well as stocks potentially benefiting from policy reversals New Oriental (EDU.US). According to documents filed with the U.S. Securities and Exchange Commission (SEC), some of the most prominent actions Third Point took in the second quarter, respectively, were to establish positions, shareholding of and more.

Chinese Large Cap ETF Volume Skyrockets Overnight

Recently, the US stock market has also received high attention on Chinese concept ETFs and related options. Overnight, iShares China Large-Cap ETF (FXI.US). Volume soared nearly 10%, with a turnover exceeding $5 billion, three times as much as the previous day, ranking tenth in the entire US stock market.

In addition, triple long position on the Chinese large cap Direxion Daily FTSE China Bull 3X Shares ETF (YINN.US), growth approaching 30%, the daily return rate leading the entire US stock ETF market; double long position on Chinese internet stocks. Direxion Daily CSI China Internet Index Bull 2x Shares ETF (CWEB.US) also rose by over 20%.

The options market is also very hot. iShares China Large-Cap ETF (FXI.US) multiple call options expiring this Friday have all earned tens of times the profit, with premiums rising up to 75 times.

According to Futu's previous reportBefore this round of Chinese concept stock market boom, 'smart money' quietly accumulated, buying a large number of call options for this ETF. Approximately 0.03 million FXI call option contracts changed hands on Monday, allowing holders to purchase 3 million shares at a price of $29.50 per share before October 18. The trading volume of call options on that day reached the highest level since July, 3.5 times the trading volume of put options.

Final Thoughts on China Consumer and Tech Stocks Surge

Recent policy changes by the People's Bank of China, including reduced housing loan interest rates, have ignited a rally in Chinese concept stocks, with the China Large Cap ETF surging 30%. Key sectors like consumer discretionary and internet saw nearly 50% gains, while heightened interest from American investors signals strong confidence in the market's growth potential.