CSI 300 Rallies 7%, Signaling Optimism in Chinese Stocks

Key Takeaway

• CSI 300 Index's 7% rally signals optimism with a technical breakout above significant resistance levels, suggesting further upside.
• Overseas investors return, reducing outflows and showing sustained buying interest amid attractive valuations in Chinese stocks.
• Earnings outlook for CSI 300 constituents improves for the first time in seven months, indicating potential market bottoming despite regulatory and economic challenges.

Technical Breakout Signals Optimism

The CSI 300 Index's performance this year has been marked by a notable technical breakout, with a 7% rally pushing it above significant resistance levels, including the Covid-era low set in March 2020 and a downward trendline from February 2021. Closing at 3,664.56 on Thursday, up from a February low of 3,179.63, the index's movement has caught the attention of market analysts. Jai Balasubramaniam, chief market technician at Cashthechaos.com, highlighted the improved sentiment and identified a technical target of 4,100 for the CSI 300 Index, suggesting further upside potential.

Overseas Investors Return

Recent trends show a reversal in fund flows, with overseas investors coming back to mainland Chinese stocks and reducing total outflows to about 100 billion yuan from a peak of 218 billion yuan in January. Additionally, inflows into Hong Kong-listed stocks through the Stock Connect program have been consistently positive, totaling HK$223 billion this year. Goldman Sachs' Asia Pacific equity strategist, Sunil Koul, noted that despite the rally, valuations remain attractive and hedge fund positioning is still near five-year lows, indicating room for sustained buying.

Earnings Outlook Brightens

April saw the first increase in earnings-per-share forecasts for CSI 300 Index constituents in seven months, a shift from a six-month streak of declines—the longest since the 2008-09 Global Financial Crisis. This improvement, however, comes amid first-quarter earnings largely missing analysts' expectations, suggesting a cautious optimism. The recent uptick in earnings forecasts could signal a bottoming out of the three-year slide in Chinese equities, with HSBC Holdings strategists pointing to cheap valuations, policy support, and resilient earnings as factors supporting a compelling risk/reward profile for the market.

Regulatory and Economic Headwinds

Despite the positive momentum, Chinese equities face challenges from regulatory and economic fronts. The appointment of new regulatory leadership aims to restore market confidence amid concerns over growth, the housing market, and high levels of debt. The performance of tech giants like Tencent, Alibaba, JD.com, and Baidu during the March-quarter earnings season is pivotal, with their results being closely watched as indicators of the broader market's health. The potential for a TARP-style program to address property market issues is discussed, highlighting the government's focus on developing a modern industrial system.

Street Views

• Jai Balasubramaniam, Cashthechaos.com (Bullish on Chinese stocks):

  "Sentiment has clearly improved, at least for the short term... There is a technical breakout on Chinese stocks with a target of 4,100 on the CSI 300 Index."

• Sunil Koul, Goldman Sachs Group Inc. (Bullish on mainland Chinese and Hong Kong-listed stocks):

  "The rally can be sustained for a while as valuations remain inexpensive and positioning from hedge funds and long-only funds remain near five-year lows despite the recent buying."

• HSBC Holdings Plc strategists including Herald van der Linde and Prerna Garg (Bullish on mainland China):

  "Investor sentiment towards mainland China has turned on the back of supportive policy announcements and resilient earnings... Cheap valuations, policy support and no major downside surprises on the earnings front should keep the risk/reward for the market compelling."