JPMorgan Chase: Chinese stocks can still rise! Increase positions in May, and then wait patiently!

Wall Street Sights

2024-05-06 20:52Posted on the official account of Shanghai Wall Street News

The recent strong rally in AH shares has caused Wall Street banks to re-examine the outlook for Chinese equities, with Bank of America Merrill Lynch saying the "worst" is behind us, and Goldman Sachs continues to bullish Chinese equities, predicting that the valuation of China-listed companies could rise by as much as 40% in an optimistic scenario.

JPMorgan Chase even called on Wall Street, aggressively increased its position in Chinese stocks in May, and then patiently waited for the economic recovery to accelerate.

JPMorgan's Wendy Liu analyst team wrote in a note released last week:

According to EPFR data, at the end of March, global, global ex-U.S., emerging markets, and Asia ex-Japan funds had equity holdings in China that were 1.8%/4.8%/3.3%/7% of their respective MSCI benchmark indices, respectively.

Each time these four funds reduce their underweight relative to the MSCI benchmark by 25 basis points, China's equity market sees a net inflow of 284 billion yuan ($39.2 billion), according to EPFR data.

From February to April this year, the MSCI China Index achieved its best three-month return since opening up, with a 9.3% increase in price-to-earnings (P/E) revalued from 8.9x at the end of March to 9.7x currently.

JPMorgan said China is already in the early stages of recovery, and government policies and market dynamics are showing positive signs, while other countries are more likely to face challenges from the late stage of recovery. The agency expects that the peak of China's next expansion cycle could arrive in the first half of 2025.

As the economy recovers at an accelerated pace, JPMorgan expects the MSCI China Index's forward P/E ratio to also grow, further driving the index's EPS (earnings per share) growth over the 2024-2025 period.

JPMorgan Chase & Co. forecasts that the annual EPS growth rate of the MSCI China Index and the CSI 300 Index will increase to 14% and 15%, respectively, in 2024, from 10% and -3% in 2023.

In addition to the improvement in earnings, J.P. Morgan pointed out that the rebound in China's stock market will be supported by positive factors such as improved shareholder returns, capital market reforms, supportive policies for the real estate market, optimistic expectations of investors, and foreign capital repatriation.

JPMorgan Chase & Co. recommends focusing on corporate earnings and real estate data for the first quarter of 2024. According to IBES data, five of the 11 GICS sectors in the MSCI China Index reversed last year's decline in EPS and achieved positive growth in the first quarter. The agency has a similar forecast for the CSI 300 index.

JPMorgan Chase & Co.'s benchmark forecast shows that the MSCI China Index and the CSI 300 Index will rise to 66 and 3900 respectively by the end of 2024, which means that there is still nearly 7% upside for the CSI 300 Index during the year.

It is worth noting that the JPMorgan report pointed out that China's real estate market has shifted from a period of growth to a period of adjustment, and despite the challenges, the demand for improved housing is likely to support the property market until 2026-2027.

According to the United Nations' population data, China's population in the age group of 35 to 65 will increase to 642.9 million by 2025, up from 622.9 million in 2023, according to the report.

As the population in the 35 to 65 age group increases, it is expected to bring a relatively steady demand for upgrades, which may seek better living conditions, thereby driving the improved housing market.

There is a certain amount of unsold inventory of completed and under-construction homes in China. The increase in improved demand can help absorb these inventories, providing support for the housing market for some time. JPMorgan Chase & Co. predicts that demand for improved housing is likely to support the housing market until 2026-2027.

In addition, according to the United Nations population data, the group of Chinese property owners will increase by 8.9 million, 11.1 million, 9.4 million and 2.7 million in 2024, 2025, 2026 and 2027, respectively, which will support the destocking of real estate during the transition period.

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