China's Stock Market Faces Challenges as Bulls Lower Expectations

China's stock market is grappling with uncertainties as bullish investors reassess their expectations for a potential rally in stock prices. With the country's economy facing challenges and global funds diverting their attention, coupled with policymakers in Beijing exercising caution in terms of stimulus measures, market analysts are adopting a more conservative stance.

In a recent development, HSBC Qianhai adjusted its year-end index targets, reducing the CSI 300 Index target by 6.5% to 4,300 and revising down the Shanghai Composite Index target by 2.8% to 3,500. Citigroup also scaled back its Hang Seng Index target to 22,000 from the previously forecasted 24,000 in February. Similarly, UBS lowered its MSCI China target to 72, compared to the earlier prediction of 83 made in January.

These downward revisions have constrained the upside potential for investors, leading them to explore alternative markets such as India and Japan in search of more promising returns. The MSCI China Index, which tracks the performance of over 700 companies listed both domestically and internationally, experienced a significant decline of 9.4% during the past three months, resulting in a US$146 billion rout. This marks the worst quarterly performance since Beijing's shift to a zero-Covid strategy in October.

HSBC Qianhai analysts, including Steven Sun based in Shenzhen, emphasized the challenging economic backdrop and the market's failure to be driven by fundamental factors. China's post-pandemic recovery has been lackluster, with manufacturing expected to contract for the third consecutive month in June, according to economists. Policymakers in Beijing have demonstrated reluctance to implement substantial stimulus measures, further dampening investor sentiment.

Foreign investors have also exhibited caution, as Stock Connect data reveals limited purchases of mainland stocks amounting to a mere 1.2 billion yuan (US$170 million) in the second quarter through June 27. Additionally, global hedge funds have withdrawn approximately 70% of the funds they previously invested in Chinese stocks since November.

Goldman Sachs highlighted that China's markets experienced a reversal from earlier gains, witnessing a decline of over 20% in the first half of the year due to concerns about the sluggish cyclical recovery. Consequently, Asian markets are anticipated to deliver subdued returns during the third quarter before potentially recovering in the final quarter.

Despite prevailing challenges, some analysts maintain a cautious optimism. They argue that much of the bad news has already been factored into current market valuations, making stocks appear attractively priced. Timothy Moe, a strategist at Goldman Sachs, pointed out that the MSCI China's price-to-earnings ratio currently stands at 10.43, below the bank's fair value estimate, indicating potential opportunities for investors.

HSBC Qianhai's Steven Sun suggested that a re-rating of Chinese stocks could be feasible in the last quarter of the year. However, addressing disappointing fundamentals and resolving liquidity tightness resulting from fund outflows are critical hurdles that the market must overcome to achieve significant breakthroughs.

While challenges persist, analysts believe that further policy easing, including potential stimulus measures, could potentially fuel a "catch-up" rally, particularly in underperforming segments of the Asian markets.

In conclusion, China's stock market confronts challenges as optimistic investors recalibrate their expectations amid a struggling economy, global fund outflows, and cautious policymaking in Beijing. However, with hurdles to overcome and effective policy implementation, there remains the possibility of a market recovery in the future. Investors will closely monitor developments to gauge the trajectory of China's stock market and identify potential opportunities for growth.

By fLEXI tEAM