The recent surge in Chinese stocks hit resistance and saw some profit-taking in the Shanghai Composite and Hang Seng.
HK 50 – Daily Chart
The HK 50 index fell to 20.926 after being rejected by resistance at the Feb 2023 high of 22,691. The market moved very fast and stretched too far from the 20-day moving average at 19,344.
Stocks tumbled 9.4% in Hong Kong for the worst day since the 2008 global financial crisis.
Shanghai and Shenzhen markets reopened with a bang on Tuesday, as turnover topped 1 trillion yuan ($141 billion) in the first 20 minutes of the session. That pushed the blue-chip CSI 300 index up 10% initially. However, a sharp selloff in Hong Kong quickly dampened the mood among investors.
Despite the recent volatility, the CSI300 is up by around 25% since the government announced a set of monetary stimulus to prop up equity and property markets.
Valuations still look cheap at only 11 times forward earnings, according to Goldman Sachs analysts, and below the 20 times currently for Indian stocks. Also, at the end of August, mutual funds were at their lowest Chinese equity allocation in the past decade. Many analysts are gloomy about the prospects due to previous slowing in the Chinese economy.
But the real issue is that the Chinese government has committed to strong stimulus and that should start to see foreign investors return. The 10% stock market drops on Tuesday were driven by the speculative swing higher, and the market will now look for buyers to return at lower levels.
Goldman Sachs raised their forecasts on the MSCI China Index and they now expect total returns of around 15% from current levels. Other investment banks, such as Morgan Stanley, believe the central government will soon announce a 2 trillion yuan fiscal package in the coming weeks, while a state-run think tank official has suggested something closer to 10 trillion yuan.
There was no mention of any further action at a press conference held by the National Development & Reform Commission on Tuesday, which hurt stocks. But a large package of that level would likely lead to another run up in stocks once a floor is reached which may not be far from current levels after sharp selling from overbought conditions.
