China’s stock market surged after the government unveiled plans to shore up the economy, suddenly sending hedge funds and strategists into what was seen as one of the most contrarian trades in recent times. The CSI 300 Index rose more than 15% last week, its best week since 2008. Earlier this year, the CSI 300 index fell to a six-year low. “There is no doubt that stocks of high-quality companies will bottom well before the index eventually bottoms,” a team led by Wendy Liu, chief China equity strategist at JPMorgan, wrote in a note on Friday. Amid the government’s measures, Ahead of the gains, investment strategists are recommending some oversold Chinese stocks. JPMorgan highlighted three stocks that have risen recently: Shanghai-listed beer company Tsingtao Brewery, U.S.-listed retailer Miniso and machinery company Zhejiang Dingli, also listed in Shanghai. “Our focus now and in the coming quarters will be on finding high-quality businesses at modest valuations,” the report said. This newfound enthusiasm for increased exposure is contagious. “We think now is a good time to ramp back up China investment,” Rupal Agarwal, head of Asia quantitative strategists at Bernstein, said in a note on Friday. “We will wait and see,” she said. “There are clear signs of change in housing/consumer sentiment and earnings growth to become more positive in the medium term.” “For now, we believe the rally is tactically supportive,” Bernstein analysts found. Two stocks with triple-digit six-month profit momentum are U.S.-listed after-school player Tal Education and Shanghai-listed Seres, which makes cars for the Aito EV brand developed with Huawei. The stocks appear on a screen looking for domestic demand beneficiaries, which is limited to companies trading at least 20% below peak levels reached in May and with optimistic 12-month earnings forecasts. U.S. hedge fund billionaire David Tepper said on CNBC’s “Squawk Box” program on Thursday that he was buying more Chinese stocks after changes in China policy. Asked about the potential impact of increased U.S. tariffs, Tepper said he didn’t care. Instead, Tepper emphasized the focus of Beijing’s latest policies on “internal stimulus” and said Chinese stocks were cheaper than U.S. stocks. That’s as opposed to, you know, the 20-plus indexes in the S&P. Sentiment Shift Sentiment toward Chinese stocks changed on Tuesday after People’s Bank of China Governor Pan Gongsheng announced a rate cut at a rare news conference with the head of securities regulators and other officials. Chinese President Xi Jinping chaired a high-level meeting on Thursday to confirm the policy measures. Leaders also called for halting the housing recession and strengthening fiscal and monetary policies. Scott Rubner, managing director and tactical expert at Goldman Sachs Global Markets, said in a trading report on Thursday that short-term traders have been buying Chinese stocks for eight consecutive days in response to the bright outlook. Rubner said: “After the U.S. election, emerging markets quickly became a favored trading species. In the past 48 hours, I have made more Zoom calls to China than in all of 2024.” The data collected shows that as of At the end of August, global mutual funds collectively allocated 5.1% of their portfolios to Chinese stocks, near the lowest level in the past decade, while hedge funds were around a five-year low, less than 7% by Goldman Sachs. Rubner said hedge fund allocations rose to 7.3% on Tuesday, the largest single-day buying by hedge funds since March 2021. Interest in Chinese stocks has been revived as institutions cut back on exposure to equities amid sluggish growth prospects, a deepening debt crisis and a stunning slump in the real estate market. Some international investors have also shied away from concerns about tensions between China and the United States. To be sure, few are betting on an unhindered, full rebound from now on, especially since China has yet to formalize the details of its fiscal policy. Chinese companies mainly trade in the United States, Hong Kong and mainland China. Retail investors account for the majority of trading activity in mainland Chinese stocks, also known as A-shares. Beijing financial blogger Li Dongfang said, “Trading sentiment has always been affected by policies and fluctuated greatly.” He bought some A-shares and Hong Kong exchange-traded funds, and was optimistic about liquor, new energy vehicles and optoelectronics stocks. “The A-share market always has a market bottom after policies start to turn supportive,” Li said. He noted that he expected the market to take some time to consolidate after the latest rise following previous declines. Policy announcements from the People’s Bank of China support further inflows into the stock market, allowing ETFs to be used as collateral for institutional loans and allowing major shareholders to borrow from banks for stock buybacks, Li said. JPMorgan Chase said, “The continued short squeeze is likely to further drive strong market performance (Friday), with Hong Kong real estate, consumer staples and consumer discretionary outperforming the A-share market, and real estate, consumer staples and financial stocks also outperforming.” Mainland China’s stock exchanges are scheduled to be closed for holidays from October 1 to October 7, as this year marks the 75th anniversary of the founding of the People’s Republic of China. —CNBC’s Michael Bloom contributed to this report.
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