Interest rate cuts and plans for fiscal stimulus are the primary reasons why Chinese stocks have rallied of late. Over the past month, the MSCI China Index is higher by almost 20%.
Some exchange traded funds have performed even better over that span. For example, the WisdomTree China ex-State-Owned Enterprises Fund (CXSE ) is higher by 21.53% over the past month, though the ETF and its peers have retreated in recent days as market participants have grown anxious about Beijing’s next steps on the stimulus front.
One conclusion analysts may draw is that the recent Chinese stock and ETF resurgence was rooted in credible fundamental catalysts. Beijing’s clear stimulus program targeted a small segment of the population. However, Chinese risk assets need definitive plans to foster the next leg up.
Catalysts Needed for More CXSE Gains
Chinese stocks, including CXSE holdings, need catalysts to further galvanize gains.
“China is the latest example of how cheap valuations can turn into a stock market rally once a catalyst emerges. Chinese shares have surged since the September politburo meeting on hopes that major fiscal stimulus may be on the way. A lack of details so far has disappointed some investors, so we eye policy announcements for more clarity,” according to BlackRock research.
The asset manager has an “overweight” view on Chinese stocks, though it acknowledges that outlook could change if stimulus efforts aren’t to the liking of financial markets.
“China’s signal on policy stimulus prompted us to go modestly overweight, especially given depressed valuations. Details have been scant, so we could change our view if future announcements disappoint. We still think China faces long-term, structural challenges – like economic and geopolitical competition with the West, government debt and population aging,” added BlackRock.
Consumer discretionary is CXSE’s largest sector exposure, and China has long endeavored to drive more domestic consumption. That remains on Beijing’s radar and likely explains why the government is mulling more direct cash assistance to various segments of the population. Market participants should hear this. A close-to-the-chest approach could suppress investors’ desire to engage with Chinese equities over the near-term.
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