Steven Sun, head of research at HSBCQianhai Securities, believes that Chinese stocks may benefit from the US Federal Reserve’s first rate cut, which is expected to be announced this week. This move could also prompt the People’s Bank of China to take action.
Sun wrote today in a client research note that “US monetary ease could be a catalyst” for a rerating in growth sectors on Chinese markets. Sun also noted that growth was outperforming value by 44 percentage points.
The iShares MSCI China ETF has fallen nearly 15% since its high for the year to date in mid-May.
How could Chinese stocks benefit from US monetary easement?
Chinese stocks have been under pressure as global institutions have favored US Treasuries, and companies such as Nvidia Corp because of the higher interest rates in America compared to China.
Steven Sun, an analyst at HSBC, noted that Chinese equities may see higher multiples of price to earnings following the Fed’s first rate cut expected on September 18.
We emphasize that earnings growth is key. We believe that growth sectors such as semiconductors and consumer electronic, which had strong earnings in the first half of 24 could outperform in the upcoming easing cycles.
Lower interest rates in the US historically have boosted global liquidity, with some of it flowing into emerging markets such as China.
The Federal Reserve also lowers interest rates to stimulate the US economy. This leads to an increase in demand for Chinese products and benefits stocks of related companies.
What Chinese stocks need beyond rate cuts
Lower interest rates can increase risk appetite and encourage investments in higher-risk assets, such as Chinese stocks. However, some experts believe that Beijing requires more than a monetary policy that is accommodative to attract international investors.
Laura Wang, of Morgan Stanley for example, believes that “business fundamentals will remain the primary factors in whether investors decide to invest in China equity or not.”
Aaron Costello, of Cambridge Associates, also considers Chinese stocks to be attractively priced in writing but identifies the “fundamental crises of confidence” linked to the ongoing turmoil of Beijing’s real-estate market as the main problem.
Costello warned that lower interest rates might not necessarily boost the Chinese economy and stock prices if “households do not want to spend the additional income.” Bill Winters, chief executive of Standard Chartered, warned clients last week that China’s house crisis, despite occasional indications of increased recovery, could not be over yet.
The outlook for the housing market in Canada and the broader economy is uncertain.
This post Chinese stocks & Fed rate cuts: What investors should know could be modified as new information becomes available
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