Will Chinese concept stocks keep climbing?

With a bullish candlestick signaling a potential rally, Chinese concept stocks have regained attention from investors, but questions linger on whether this uptrend can be sustained over the long run.

The good news that triggered the market is mainly the policy decisions made by China's high-level meetings. Recently, the Political Bureau of the Communist Party of China Central Committee meeting put forward, "active capital market, boost investor confidence".

Immediately following, the China Securities Regulatory Commission convened the 2023 system mid-year work symposium, once again from the capital market point of view to make clear the second half of the work arrangements: will be from the investment side, the financing side, the trading side of the integrated policy, concerted efforts. Promote the reform of the registration system to go deeper and more practical, and solidly promote the reform of the investment side and regulatory transformation.

Stimulated by favorable policies, the pessimistic expectations of market volatility since May have been rapidly weakened, and confidence in the strengthening of economic momentum has been restored, resulting in a retaliatory valuation recovery of Chinese assets since last Friday, led by weighted sectors.

On the one hand, the Fed raised rates by 25 bps at the July FOMC meeting as expected, close to the end of the current rate hike cycle (but probably not the last).

On the other hand, the Bank of Japan (BoJ) indicated that it would flex its Yield Curve Control (YCC) to allow the purchase of 10-year JGBs at a rate of 1.0%. However, the BOJ governor said the adjustment would not change the easing stance. There are comments that the Bank of Japan's decision-making appears less hawkish.

These are favorable to ease the market on the U.S. stocks and emerging market stocks liquidity concerns.

Global hedge funds' net exposure to Chinese equities (relative to their global equity holdings) has fallen since February and is now at a 12-month low.

However, Goldman Sachs pointed out in its latest report that with the Politburo meeting confirming the economic policy tone for the second half of the year, a "policy bottom" has been formed in the Chinese market and a window to go long on Chinese equities has now opened.

Based on empirical evidence, there are now signs that Chinese stocks are expected to perform better in the coming months. Goldman Sachs pointed out that the statement of the high-level meeting also explicitly mentioned "support for platform enterprises", which is a positive signal for China's TMT stocks.

From an investment perspective, Goldman Sachs emphasized that it is strategically optimistic about A-shares, and recommends an overweight allocation to mainland and offshore stocks, with the MSCI China and CSI 300 indexes expected to return 9% and 15% respectively over the next 12 months.

In terms of sector selection, Goldman Sachs recommends an overweight in online retail, media, consumer services, healthcare services and insurance.

CICC believes that investors can be relatively more active. The short-term improvement in market sentiment is expected to bring greater benefits to policy-beneficial and cycle-sensitive sectors, such as consumer, internet and even real estate.

However, CICC is of the view that for the market to realize a trend breakthrough, it may need more policy implementation and realization of the implementation effect. Until then, sectors with more stable cash flow returns and those that may see cash flow improvements in the future (e.g., some Internet, consumer, software and hardware, and some healthcare sectors) are still expected to bring more certainty.