June looks like a game changer for struggling Chinese stocks

(Bloomberg) – From the rollback of a crackdown on tech giants to some easing of Covid restrictions, the month of June has brought a double dose of good news for China’s stock investors so far.

Major equity indicators in China and Hong Kong are all recovering this month, defying a global decline, with an MSCI Inc. indicator for Chinese equities just capping its best week since July 2020. While a rebound in virus cases poses a new risk, word is growing that this year could mark the start of a more sustained rally in one of the world’s worst-performing major markets.

Just this week, Morgan Stanley, Bank of America and Jefferies Financial Group Inc. all ramped up their bullish comments on Chinese stocks, while foreign investors have been net buyers for 10 straight days, the longest since December.

“The recovery rally is far from over in our view, and subdued demand and the backlog of orders due to the lockdown will lead to a strong surge in activity in the coming months,” said Hua Tong, fund manager at Shenzhen Zhengyuan Investment Co. “Looking back at the early second quarter, the pessimism was overdone. It is likely that there will be an equally strong revival in confidence.”

Strategists at Morgan Stanley, well-known Chinese bears, suggested investors gradually reintroduce growth stocks amid the “final stretch of a bear market,” while noting there will be “hiccups” during the recovery.

The benchmark CSI 300 index just capped its biggest two-week gain since February 2021, and is up 3.6% in June. The Hang Seng readout of Hong Kong-listed Chinese tech stocks is up nearly 8%.

This uptick in sentiment is a sharp reversal of the deep pessimism that had ensnared markets through March.

Another important driver of sentiment is the political tailwind. Authorities are offering stimulus and subsidies to sectors hit by lockdowns, while the People’s Bank of China’s looser monetary policy stance is holding back aggressive tightening in most parts of the world.

tech revival

For the struggling tech sector, a series of events this week provided tangible evidence of a move away from heavy-handed regulation.

The latest news that regulators are in the early stages of discussions over a possible revival of Ant Group Co.’s IPO has fueled bets that the days of the tech crackdown are over, even as China’s securities regulator approves the report has denied.

The development followed a report suggesting a possible end to the investigation into Didi Global Inc. – the ridesharing company that had caught Beijing’s crosshairs – and a second batch of new gaming approvals this year.

“The risk-reward profile is much more favorable for Chinese equities in the second half of the year,” said Vivian Lin Thurston, a portfolio manager at Chicago-based William Blair Investment Management, but cautioned that the bottoming process will not be linear.

Covid hurdle

Of course, the recent recovery has its skeptics.

Nerves remain that the nation’s zero-Covid approach could trigger new lockdowns and derail economic growth and business plans at any time. Shanghai will briefly lock down most of the city for mass testing this weekend as Covid-19 cases continue to emerge.

READ: Shanghai returns to lockdown for mass testing over Covid fears (1)

“There will inevitably be sporadic cases when things reopen, and infection numbers will be constantly checked by traders,” said Xiong Lin, director of research at Shanghai Ruiyi Asset Management Co. “Conviction on the strength of the economy needs to be corroborated by macro data , before stocks can go higher.”

‘Hit a rock bottom’

But right now, the prospect of a strong rally looks too good for most investors to pass up.

Over 10 consecutive sessions, foreign funds have bought Chinese stocks net worth 66 billion yuan ($9.9 billion). Market activity returns. Sales topped 1 trillion yuan in four days this week, the first time it has been this strong since March.

The Hang Seng Tech Index broke its 50-day and 100-day moving averages, key technical signals that suggest more gains are imminent.

“I don’t think you want to be underweight right now,” Herald van der Linde, head of APAC equity strategy at HSBC Holdings Plc, said in an interview with Bloomberg TV on Friday, referring to Chinese stocks. “It seems like we’ve hit rock bottom as lockdowns ease a little bit and things are starting to improve.”

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