How to seize investment opportunities in the China bull market?

In the last week of September, market focus shifted to the China Rally. The Chinese and Hong Kong markets experienced a strong rebound after the announcement of large-scale fiscal and monetary stimulus policies by China. From September 23 to September 30, the Hang Seng Index rose by a total of 15.75%, while the Nasdaq China Golden Dragon Index surged by 24.5%, significantly outperforming global markets.

Benefiting from the rebound in the Chinese market, U.S.-listed Chinese stocks, including Lexin (LX), Lufax (LU), Dada Nexus (DADA), Bilibili (BILI), TAL Education (TAL), Up Fintech (TIGR), Gaotu (GOTU), Noah Holdings (NOAH), JinkoSolar (JKS), and Boss Zhipin (BZ), showed outstanding performance.

Given that the Hong Kong market rebounded by more than 30%, what upside potential remains in this bull market? How can we seize investment opportunities?

How Much Further Growth Can We Expect from the Current China Rally?

To answer this question, we need to consider a few areas:

Upcoming Policies : Bull Market Driven by Favorable Policies and Future Measures

A combination of fiscal and monetary stimulus introduced by the People's Bank of China (PBOC) is driving this round of market growth. The policies include cutting the bank rate and the reserve requirement ratio (RRR) by 50 basis points and introducing several programs to facilitate stock purchases to support equity markets. All these actions signal that the PBOC is providing a safety net for stocks and the economy.

The market is waiting to see if additional potential policy measures will be implemented in the real estate and consumer markets, such as further relaxing property purchase restrictions, reducing mortgage rates for existing homes, increasing subsidies for second-child births, and issuing consumption vouchers to rebuild consumer confidence in China.

Technical Analysis: Hang Seng Index Rises Amid Overbought Conditions

Hang Seng Index has risen to 21133.68 points, the optimistic sentiment is approaching the high point of the initial outbreak opening of 2023 (22700.85). Therefore, in the short term, the market sentiment is running ahead, and the market has factored in expectations more fully, with technical indicators showing a possible 'overbought' situation in the short term.

FOMO sentiment

The heightened market sentiment in Hong Kong has fueled a significant wave of 'fear of missing out' (FOMO), leading to emotional reactions that can be excessively rapid. This phenomenon has resulted in noticeable 'overdrafts' in certain technical indicators, signaling potential market corrections. For instance, the 6-day Relative Strength Index (RSI) of the Hang Seng Index has soared to 97.182, marking its highest level since the end of 2018.

Fundamental Aspect: Trading and Passive Funds Dominate Amid Limited Long-Term Inflows

China International Capital Corporation (CICC) reported that the current market is dominated by trading and passive funds, with limited inflows from long-term funds.

1) Dominance of Trading and Passive Funds: Currently, trading funds, such as hedge funds, are highly active and responsive, similar to previous market peaks. At the same time, the inflow of passive funds has increased, indicating that more retail investors are entering the market, driving the rise of major stocks.

2) Limited Inflow of Long-Term Foreign Funds: Many long-term investors are reducing positions to avoid passive losses during market rebounds and have not significantly increased their positions.

FOMC interest rate cut:

The Hong Kong Monetary Authority cut rates for the first time in four years as the Fed began its rate cut cycle. The easing of monetary policies and the increase in money supply have supported the Hong Kong stock market. Industries most sensitive to interest rates and policy changes, such as real estate, investment and asset management, and securities and brokerage sectors, have excelled, with impressive gains of 55.12%, 50.55%, and 44.58%, respectively. Markets are still waiting to see if further rate cuts will occur, triggered by the Fed.

Investment Strategies for Maximizing Gains in a Bull Market

The current bull market is largely fueled by favorable policies, with expectations that future measures will continue to bolster market momentum. However, despite this optimistic sentiment, the market may be experiencing a short-term "overbought" situation. Additionally, the lack of significant inflow from long-term funds could constrain the stock market's short-term upside potential. In the current market environment, investors can focus on the following strategies in the short term:

• Cyclical strategy:  If subsequent policies are implemented and fiscal stimulus exceeds expectations, cyclical sectors (such as consumer, real estate chains, and non-banking financial institutions) are expected to see performance opportunities.

• Rate-sensitive strategy: Continue to focus on rate-sensitive growth stocks, such as those in internet technology and biotechnology.

• Good qualilty company strategy: Look for high-quality companies, such as central state-owned enterprises. Central state-owned companies with low price-to-book ratios are usually considered previously oversold sectors (such as internet software, food retail, and medical services equipment).

Overall, the strong rebound in the market during the last week of September is the result of the combined effects of policy support and market sentiment. Despite facing short-term technical overbought risks and challenges in policy implementation, it is essential to monitor the gradual realization of these policies and improvements in fundamental factors. Additionally, keeping a close eye on policy dynamics will help inform wiser investment decisions amidst future market fluctuations.