5 reasons why China’s recent stock market rally is fundamentally different

So far, 2024 has been a dynamic year for China’s stock market. In January, a derivatives-driven meltdown caused Chinese stocks to fall on the Shanghai and Shenzhen Stock Exchanges, with a ripple effect on Hong Kong and US-listed China ADRs. This liquidation event was initiated by the poor positioning of Chinese stocks among investors. Liquidation of index futures began as the Hong Kong and mainland China benchmarks reached significant levels of the rounded index. There were no buyers on the other side of the trade, so the market fell.

However, the situation for Chinese stocks may improve. From February 2nd^n.d. And through the end of April, the KraneShares CSI China Internet ETF (ticker: KWEB) has returned +20.49% and the KraneShares MSCI China A 50 Connect Index ETF (ticker: KBA) has returned +, compared to 1.90% for the S&P 500. It was 17.90%. Nasdaq 100 -0.95%.¹ Can this rise be sustained? We’ve compiled five key points for investors to consider about why this breakout is fundamentally different from previous bull markets.

Performance data quoted represents historical performance. Past performance does not guarantee future results. The return and principal value of an investment will fluctuate so that an investor’s shares, when redeemed or sold, may be worth more or less than their original cost. Current performance may be lower or higher than estimated performance. For performance data up to the end of last month, Please click here For KWEB

KraneShares CSI China Internet ETF
and here For KBA

CraneShares Vocera MSCI China A ETF
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1. The government is buying stocks and talking about them.

The Chinese government has been buying mainland stocks to stabilize the domestic stock market and influence stock indexes. Mainland China does not have a market circuit breaker, a temporary measure that halts trading to curb automated trading on stock exchanges. These circuit breakers are common in many developed markets, including the United States. China does not have a circuit breaker, so government-related entities act as buyers of last resort during periods of volatility. In the past, government stock purchases have been carried out individually and with little publicity, but this time China’s stock purchases are more public.

One such buyer is Central Huijin Investments, an entity within China’s sovereign wealth fund.The state-owned company announced the purchase of mainland China-listed ETFs in February.² It then increased its holdings in mainland bank stocks in April, according to its quarterly report.³.

State-linked stock buyers are common in Asian markets, and their activity could boost investor confidence. For example, Japan’s central bank has a long history of purchasing stocks and ETFs listed on Japanese exchanges. We believe that one reason why Asian investors are overweight Japanese stocks is due to government purchases of equity ETFs and recent corporate reforms that are seen as shareholder-friendly. This similar recipe for stock investment success has been replicated in China, where state-run funds buy mainland-listed megacap stocks and ETFs that influence stock indexes.

The government buyers partially financed the purchase through Northbound Stock Connect, a reciprocal market access program that allows investors to buy stocks listed on the Shanghai and Shenzhen stock exchanges through Hong Kong accounts. ing. The surge in inflows to Northbound Stock Connect in recent weeks has been significant.

We have focused on the very large companies available through the Stock Connect program, as these companies have the most weight and influence on the index. buy 300^th Stocks in the index are meaningless because they have minimal impact on the index compared to the top holdings.

Taking this into account, our 50-share KraneShares MSCI China A 50 Connect Index ETF (ticker: KBA) has a lower holding rate compared to other mainland-focused ETFs, which typically hold closer to 300 to 600 shares. We believe that we should focus on mega-cap stocks.

2. Global investors are coming back..

January’s decline was partly due to investors being neutral or underweight on Chinese stocks. US investors were the first to abandon China due to trade and technology wars, followed by China’s internet regulation cycle and zero-corona policy. Next, European investors reduced their positions in response to the geopolitical uncertainty that prevailed after Russia’s invasion of Ukraine. Asian investors eventually followed suit, but were slow to reduce their exposure due to their proximity to China’s economic trajectory. Finally, local Chinese investors made a long-delayed divestment from mainland stocks following the derivatives-driven sell-off earlier this year.

We believe that reallocation to China’s stock market could occur in the reverse order, with domestic Chinese investors returning first, followed by Asian investors, and then European and American investors. I doubt it.

The inflow into Hong Kong stocks from mainland China through Southbound Stock Connect (a reciprocal market access program that allows mainland investors to invest in Hong Kong-listed stocks) will help local Chinese investors already invest in at least offshore stocks. It shows that it is starting to come back.

At the same time, we believe many Asia-focused investors who have been overweight India and Japan are becoming increasingly concerned about India’s high valuations and Japan’s continued weakness. China’s stock market could benefit from investors shifting profits from high-value markets to low-value markets.

3. New policies support shareholders.

On April 12, the State Council announced “nine key points” to improve China’s capital market. This is a rare document released by China’s highest political body, the State Council (similar to the presidential cabinet in the United States), which does not normally comment. market. Among the measures are efforts to manage the supply of IPOs, encourage companies to pay dividends and improve corporate governance, and increase allocations to stocks in banks and trust products. include.

4. Consumers are alive and the economy is improving.

China’s economic cycle is improving, as evidenced by GDP growth in Q1 2024 of 5.3% versus an estimated 4.8%, +1.6% compared to Q4 2023 shows improvement.^Four The Citi Economic Surprise Index measures the extent to which a particular country’s economic announcements surprise on the upside or downside. After declining in 2023, the China index has been steadily rising since the beginning of the year. Although expectations for these announcements were already low, the index has shown an overall upward trend since January.

Although Chinese households maintain historically high savings rates, consumer confidence is gradually improving. Releasing these savings would likely provide a significant economic boost.

Consumption has recovered, but remains focused on services such as travel, which is reflected in restaurant chains and travel agencies’ Q4 2023 financial results. If you were to start spending money, what would you do first? Personally, I would take my wife out to dinner. Then plan your vacation.

Alibaba’s online travel platform Fliggy reported that “overseas travel bookings for the 2024 holiday period have doubled compared to the previous year.”^Five International travel costs more than domestic travel, and popular destinations include Japan, Thailand, South Korea, and Australia. This may indicate increased consumer confidence compared to his 2023 year, when travel was concentrated domestically.

Policy support for consumption has been phased in, but support is beginning to accelerate. Following the “second meeting” in March, the government announced an increase in incentives for upgrading large items such as cars and home appliances.^Four This shows that the government has a strong interest in economic recovery.

5. Current valuations cannot be ignored, and share buybacks are rapidly increasing.

Improving earnings and lower valuations could be the catalyst for continued outperformance in certain sectors in China. While some investors have yet to recognize the attractive valuations of Chinese stocks, many companies are taking matters into their own hands, buying back their own shares, mainly in the internet sector.

At the same time, the fundamentals of these companies are improving. Three- and five-year earnings per share (EPS) growth estimates for Internet and e-commerce companies included in the MSCI China Index have been trending upward over the past two years, and are now expected to expand across a wide range of consumer-related stocks and other is several times higher than the average for stocks. Industries in the index.

conclusion

The likelihood of China’s current bull market continuing depends on several factors, many of which we believe are already in place. The current bull market could be fundamentally different. Because state investors are aggressively pushing for stock purchases, global investors are coming back, albeit slowly, shareholders are being supported by top-down policy, and the economy is recovering significantly. valuations are more attractive than ever. This is due to improved earnings expectations for Internet companies.

For Mainland China A shares (Mainland China stocks), preference is given to the top 50 largest and most liquid stocks available through the Northbound Stock Connect program, accessible through the KraneShares MSCI China A 50 Connect Index ETF (ticker: KBA) To do. For offshore Chinese stocks (Hong Kong and US listed stocks), we prioritize top internet companies, accessible through the KraneShares CSI China Internet ETF (ticker: KWEB).

Quote:

1. Bloomberg data as of April 30, 2024.
2. Global Times. “Central Investing Company increases holdings in China A-share market ETF,” Global Times. February 6, 2024.
3. “The State Fund of China reportedly pumped $41 billion into the stock market in the first quarter,” Reuters reported. April 22, 2024.
4. Data from Bloomberg as of March 31, 2024.
5. Data from Alibaba as of April 30, 2024.

Definition:

Consumer expectation index: Consumer confidence is a measure of consumers’ willingness to part with cash in exchange for goods and services. This indicator is typically collected by analyzing spending trends among individuals within the economy and is typically maintained by government agencies responsible for research and economic data.

Hangsen index: The Hang Seng Index (“HSI”), the most widely cited indicator of the Hong Kong stock market, includes the largest and most liquid stocks listed on the main board of the Hong Kong Stock Exchange. The index was launched on November 24, 1969.

CSI 1000 Index: The CSI 1000 Index selects 1,000 liquid small-cap A shares that are not included in the CSI 800 Index. This index was established with a base value of 1000 and a base date of December 31, 2004.

MSCI China Index: The MSCI China Index captures a representative representation of large- and mid-cap stocks across China A-shares, H-shares, B-shares, red chips, P-chips, and foreign listed stocks (such as ADRs). The index consists of 703 constituents, covering approximately 85% of this Chinese stock universe. The index currently includes large-cap A shares and mid-cap A shares representing 20% ​​of float-adjusted market capitalization. This index was launched on October 31, 1995.

Earnings per share (EPS): Earnings per share is a company’s net income less preferred dividends divided by the average number of common shares outstanding.

Stock buyback yield: The amount of outstanding purchases under a company’s current stock repurchase plan expressed as a percentage of the company’s current free float.