Can the Chinese Stock Market Rally Be Sustained?

After a significant rebound, it may still be too early to talk about exiting the market.

In recent months, the Chinese stock market has shown a strong upward trend. The Shanghai Composite Index (A-shares) has rebounded by over 17% from its early February low, while the Hang Seng Index (Hong Kong stocks) has entered a technical bull market (with gains exceeding 20%), marking a comprehensive "great counterattack."

For investors, the next question is: Should they sell at the highs or continue to hold?

Goldman Sachs and HSBC both released reports on May 20, indicating that from a historical data perspective, the current rally is still in its mid-stage, and the market has room to rise further.

According to historical data, the Chinese market's rally may not yet be at its end.

Goldman Sachs points out that over the past 20 years, once entering a technical bull market, there is a 60% chance that the market will continue to rise, with an average maximum return rate of 35% over the next six months.

HSBC notes that since 2000, the Hang Seng China Enterprises Index has experienced 12 instances where it rebounded more than 30% within an average of five months. After each of these rebounds, the index's upward trend continued for another four months, with an average return rate of 27%.

So, what will continue to drive the stock market rebound? HSBC believes the following factors are at play:

Overall Valuation: Chinese stocks are still valued lower than their five-year average, providing supportive valuations.
Stock Buybacks: There may be an increase in corporate stock buybacks, and there is still room for "interest rate cuts and reserve requirement ratio reductions" within the year.
Southbound Funds: Up to a quarter of buying in the Hong Kong market comes from southbound funds, and there is still significant room for foreign investment.
Supportive Policies: Continued supportive policies.
Goldman Sachs concludes in its report that, under the triple benefit of policy support, attractive valuations, and earnings potential, the outlook for the Chinese market remains positive.

The Next Key Driver: Earnings
Goldman Sachs points out that as the rally continues, the key driver of the upward trend will shift from valuation expansion to earnings revisions. This means that earnings performance will play a crucial role in the sustainability of the bull market.

HSBC notes that in the short term, any positive news regarding earnings will provide some support to the stock market.

In the long term, there is indeed a risk of consensus earnings expectations being revised downward, but this may not become apparent until the fourth quarter of 2024. Until then, the market still has substantial support.