JPMorgan Favors Low-Cost Options for Potential China Rebound

After three years of bumpyness, valuations in the Chinese market appear notably low compared to other emerging markets. Investors who would like to take exposure to China equity should consider using "cheap options" to benefit in the country's potential recovery, say strategists at JPMorgan Chase on Monday.

As a result of China's official manufacturing data posting its highest level in a year, robust exports, and rising consumer prices, investors are becoming more upbeat about the second-largest economy in the world. Strong manufacturing, a resurgence of foreign investment, and the so-called National team's capital to save the market have all contributed to the recent resurgence of the Hang Seng Index from its January bottom.

Economic data, including China's official Manufacturing PMI and new orders index for March, have climbed to their highest levels since March 2023, along with the Caixin Manufacturing PMI for March also reaching its peak since February 2023, signaling a resumption of expansion in the manufacturing sector.

Another sign of improving investor outlook is that the volatility skew for the HSCEI has dropped to its lowest level since 2017, suggesting a reduced need for protection against significant downturns.

JPMorgan strategists believe it could be too early to move heavily into the market based on improved economic activity. They favor large-cap stocks supported by corporate buybacks and "national team" backing.

It's noteworthy that a growing number of foreign institutions have recently been vocal about their bullish stance on Chinese assets. On April 8, chief economist for Greater China at Citigroup, Yuxiang Xiong, released an analysis report stating that Citigroup has raised its forecast for China's GDP growth this year from 4.6% to 5%, expecting the country's annual growth targets to be achievable.

At the end of February, Morgan Stanley released research indicating that changes in regulatory policy stance, support for the private sector, a stabilizing real estate market, and a rebound in price indices are all contributing to a recovery in the A-share market and attracting capital inflows. In early March, the Goldman Sachs research team for Chinese equities maintained a high allocation rating for China's A-shares, forecasting a 10% expected return for the MSCI China Index and the in 2024, with corporate earnings growth expected to be between 8% and 10%.

Challenges are still ahead of the resurgence of the world's second-largest economy. On Tuesday, Fitch affirmed China's sovereign rating at 'A+', although the outlook was downgraded to negative as the firm forecasted economic growth this year would slow.