(Bloomberg) — Shares in China that are traded in Hong Kong experienced their biggest surge in almost two years, adding to the excitement spurred by government stimulus measures as traders returned from a public holiday.
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The Hang Seng China Enterprises (^HSCE) Index rose as much as 8.5%, marking its 13th consecutive day of gains. Leading the charge were property developers, with a sector index soaring by as much as 35%, a record intraday increase, while an index of brokerage shares, a measure of risk sentiment, soared 32%. Mainland Chinese exchanges remain closed until October 8 for a week-long holiday.
“Hedge funds and mutual funds, which were previously underweighted, are now increasing their positions in Chinese assets,” commented Billy Leung, an investment strategist at Global X Management in Sydney. “These movements are being backed by a broader rebound in key markets like copper and Asia Pacific currencies, fueled by revitalized optimism about China’s growth.”
Investor sentiment towards equities in the world’s second-largest economy has seen a significant turnaround since the start of last week, following the announcement of a series of stimulus initiatives, which included interest rate cuts, the release of cash for banks, and liquidity support for stocks. Additionally, four major cities relaxed home-buying restrictions, and the central bank took steps to lower mortgage rates.
Optimism is growing that this surge in stimulus signifies the end of a three-year decline in Chinese shares, a downturn caused by an unsteady economy and a prolonged property crisis. Nonetheless, there have been several previous false starts, most recently a rally that began in February, so investors have good reason to remain cautious.
The attractive valuations of Chinese equities, following their extended decline, are currently enticing investors.
Despite the recent rally, the Hang Seng China Enterprises Index is still trading at below nine times projected earnings for the next 12 months, substantially less than half the valuation of the S&P 500 (^GSPC), according to Bloomberg’s compiled data.
Brokerages surged on Wednesday, fueled by optimism that they will be major beneficiaries of the stock trading frenzy, earning commissions on every trade. China Merchants Securities Co. saw its shares increase by as much as 76%, while Guolian Securities Co. rose nearly 50%.
According to Goldman Sachs Group Inc., hedge funds are investing in Chinese stocks at an unprecedented rate. Leveraged funds made record net purchases of Asian stocks in September, with China and Hong Kong leading the charge, according to data from the investment bank’s prime brokerage department.
Billionaire investor David Tepper is increasing his investments in “everything” related to China, while BlackRock Inc., the world’s largest money manager, has now taken an overweight stance on Chinese shares. US-based Mount Lucas Management has taken bullish positions in China exchange-traded funds, while Singapore’s GAO Capital is acquiring large-cap Chinese stocks.
“If upcoming policies exceed expectations, I believe the bull market could last anywhere from three months to half a year,” stated Bo Pei, an equity research analyst at US Tiger Securities Inc. “A correction following such a rapid rise is not unusual. What’s critical is whether the upward trend continues post-correction. Personally, I am quite optimistic.”
The effects of the stock rally are also visible in the currency market.
A gauge for one-month borrowing costs in Hong Kong dollars increased for an eighth consecutive day, reaching its highest level since August, indicating that liquidity is tightening amid seasonal cash demand and a stock market surge. The Hong Kong dollar approached the strong end of its trading band, while the offshore yuan also appreciated.
The stock rally has proven so impactful that in just eight days, China has regained its previous weighting in emerging-market indexes, which it had lost over the past ten months.
China’s share of MSCI Inc.’s index for developing-nation equities climbed to 27.8% at the end of September, the highest level since November 2023, as per data compiled by Bloomberg for stocks listed on mainland, Hong Kong, and other international markets.
Chinese stocks have outperformed global equity benchmarks over the past month, with the Hang Seng China Enterprises Index leading the way with a 31% gain, followed closely by the Hang Seng Index with a 28% increase.
“We are becoming more optimistic about China’s economic outlook,” remarked Sylvia Sheng, a global multi-asset strategist at JP Morgan Asset Management, in a client communication. “Favorable signals from the Chinese government and regulators, along with their increased focus on fostering economic growth and stabilizing the property sector, should help establish a floor for market prices and boost momentum in the equity markets.”
—With assistance from John Cheng and Tian Chen.
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