Chinese stocks are anticipated to see modest gains in the second half of 2023 as investors grapple with concerns over the extent of policy stimulus to revive the faltering economy. Analysts and money managers surveyed by Bloomberg estimate that the benchmark CSI 300 Index of mainland shares will likely climb approximately 3% this quarter, while Hong Kong’s Hang Seng Index may advance less than 6%. Weak economic data is cited as the main worry, overshadowing geopolitical risks and the possibility of a US recession.
Though most respondents believe that the market has hit bottom, year-end projections suggest that major indexes will struggle to reach their previous peaks seen during the reopening rally. This somber outlook indicates that investors do not anticipate any significant game-changer for the sluggish stock market, as authorities have remained silent on large-scale stimulus measures despite pledging support for the economy.
Citigroup analysts have warned that China is on the verge of a self-fueling confidence trap as the initial reopening impulse begins to fade. They have trimmed their target on the Hang Seng Index, which consists primarily of mainland companies. The analysts predict that stocks will trade within a range in the second half, with the outlook heavily relying on a combination of stimulus measures. Similarly, UBS Group AG has also reduced its target on the Hang Seng Index due to weaker growth.
Traders have lost confidence as the second leg of the reopening rally has proven elusive, exacerbated by manufacturing activity contracting and services losing momentum. While the CSI 300 remains flat for the year, Japan, Taiwan, and South Korea have seen double-digit gains. The Hang Seng Index has fared worse, with a decline of over 4%, making it one of the poorest performers among 92 primary indexes tracked by Bloomberg.
Investors are troubled by the absence of an easy solution to China’s economic woes. Reluctant consumers, record-high youth unemployment, weakening demand at home and abroad for manufacturers, towering local government debt, and the depreciation of the yuan indicate limited room for aggressive monetary and fiscal easing.
Despite muted expectations for returns, only one survey respondent stated that they plan to reduce their exposure to China stocks in the coming months. The rest were divided between those who plan to add and those who will remain unchanged.
Some investors believe that the skepticism is exaggerated. David Chao, Global Market Strategist for Asia Pacific at Invesco Asset Management, argues that China’s valuations might be too bearish, leaving room for a more positive outlook in the second half. While individual measures may not significantly impact the market, their cumulative effect could be substantial.
Nevertheless, major banks have downgraded their index targets, and there is a growing sense of bearishness. UBS joined Goldman Sachs Group Inc. and Morgan Stanley in reducing their MSCI China forecasts. Furthermore, the mid-June State Council meeting has proven to be anticlimactic, with no concrete measures released. Market participants are now looking to the July Politburo meeting, where top decision-makers led by President Xi Jinping are expected to discuss new measures to boost the property and consumption sectors.
To restore confidence, investors are calling for increased fiscal support in the form of consumption vouchers and tax breaks. Reviving the property market, as home price growth slows, is particularly crucial. Observers are eagerly waiting for more substantial measures to be announced, including the removal of purchase restrictions in high-tier cities.
This news comes as overseas investors have shown a net outflow of 2.7 billion yuan ($372 million) from mainland shares in the second quarter, marking the first quarterly outflow since September.
Though returns are expected to be modest, investors remain cautiously optimistic about the Chinese stock market. While challenges persist, the potential for positive surprises and the attractiveness of current valuations could sway sentiment in the second half of the year.
