Chinese stocks could benefit as the US Federal Reserve prepares to announce its first rate cut this week, according to Steven Sun, the head of research at HSBC Qianhai Securities. This move may also prompt action from the People’s Bank of China.
“US monetary easing could be a catalyst for a rerating of growth sectors in Chinese markets, with growth outperforming value by an average of 44 percentage points,” Sun wrote in a research note to clients today.
The iShares MSCI China ETF is currently down nearly 15% from its year-to-date high in mid-May.
How could Chinese stocks gain from US monetary easing?
Chinese stocks have faced pressure recently as global institutions favoured US Treasuries and companies like Nvidia Corp due to higher interest rates in the United States compared to China.
However, Chinese equities could see higher price-to-earnings multiples following the Fed’s expected first rate cut on September 18, Steven Sun of HSBC noted in his note.
We stress that earnings growth is the key. We think growth sectors like semiconductors and consumer electronics, which recorded strong earnings in 1H24, could outperform during the upcoming easing cycle.
Historically, lower interest rates in the US have boosted global liquidity, some of which tends to flow into the emerging markets like China.
Additionally, the Federal Reserve often lowers rates to stimulate a stronger US economy, leading to an increased demand for Chinese goods and benefitting stocks of the related companies as well.
Beyond rate cuts: what Chinese stocks need for recovery
While lower interest rates typically improve risk appetite, encouraging investments in higher-risk assets such as Chinese stocks,some experts believe that Beijing needs more than an accommodative monetary policy to attract global investors.
Laura Wang of Morgan Stanley, for instance, believes “business fundamentals” will remain the primary factor in whether investors choose to invest in China equities or not.
Similarly, Aaron Costello of Cambridge Associates considers Chinese stocks as attractively priced at writing but dubs a “fundamental crisis of confidence” tied to the ongoing turmoil in Beijing’s real estate market as the main issue.
Costello also cautioned that lower interest rates may not necessarily boost the economy and, therefore, the stock prices in China if “households don’t want to spend the extra income.” Last week, Bill Winters, the chief executive of Standard Chartered warned clients that China’s housing crisis, despite occasional signs of increased recovery, may not be over just yet.
The outlook for the country’s housing market and broader economy remains uncertain.
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