Is It Still a Good Time to Invest in China's Market? HSBC's Analysis on FTSE China A50 Rally

Chinese policymakers have recently unveiled various monetary, fiscal, and equity market stimulus measures, leading to a significant surge in the FTSE China A50 index. The market jumped by 28% in just two weeks, causing many investors to wonder if the opportunity has already passed. However, HSBC strategists assert that it’s still a prime time to invest in China's market, upgrading the mainland China market to "Overweight."

Historical Rallies in FTSE China A50

A review of 30 historical rallies in the FTSE China A50 index since 2005 shows that, on average, these surges last around 76 trading days with gains of approximately 38%. In about 25% of these cases, the growth has approached as high as 60%, suggesting that the current rally could still have room to expand.

"Chinese valuations remain attractive, trading at an 18% discount compared to emerging markets, as opposed to the 5% historical discount,” HSBC strategists highlighted in a recent analysis. Moreover, their machine learning valuations model indicates that the mainland China market is still about 15% undervalued based on fundamental indicators.

Potential for Market Inflows and Undervalued Sectors

Currently, investors are underweight in the mainland China market by 230 basis points, putting them in the bottom 10th percentile in comparison to historical benchmarks. This positioning suggests a strong potential for future inflows, especially as market sentiments adjust.

From a sectoral perspective, HSBC strategists favor growth sectors such as consumer discretionary and information technology. Additionally, state-owned enterprises (SOEs) undergoing reforms, like telecom companies and stocks with high dividend yields, stand to benefit from the evolving market.

The Importance of Sustained Policy Support

While the recent policy stimulus has sparked optimism, HSBC stresses that consistent policy support will be crucial to sustain this positive market momentum. Since 2021, there has been a lack of consistent follow-through, especially on fiscal policies. However, HSBC believes that the tone of China's policymakers may shift favorably this time, potentially supporting a more sustained rally.

Potential Risks to China's Market Rally

Despite the positive indicators, HSBC cautions that the rapid pace of the current FTSE China A50 rally may not be sustainable. A pullback could occur before the market regains momentum, likely at a slower and more stable pace. Additionally, the upcoming U.S. elections pose a risk factor, as potential tariffs on Chinese imports—such as the proposed 60% tariff by Mr. Trump—could impact the market dynamics.

In summary, HSBC strategists see strong opportunities in China's market, particularly in the FTSE China A50 index and key growth sectors. However, careful monitoring of policy support and geopolitical risks will be critical for investors looking to enter or expand their positions in this emerging market.