Iron ore prices surged, Hong Kong stocks in a "technical bull market", is the "long China" trade back?

Recently, Chinese assets have experienced a surge, with Hong Kong stocks soaring and the Hang Seng China Enterprises Index entering a technical bull market. Global funds are flowing back into the Chinese market, is the "long China" trade back?

On April 10th, Hong Kong stocks surged, with the Hang Seng China Enterprises Index rising over 2% to 6016.83 points, a 20% increase from the phase low set in January, entering a technical bull market.

Overnight, U.S. assets saw a major surge, with the Nasdaq Golden Dragon China Index rising by 1.68%. Currently, the P/E ratio of the Nasdaq Golden Dragon China Index is only 20 times, while the P/E ratio of the U.S. Nasdaq Index has reached 30 times. From a valuation perspective, Chinese concept stocks still remain attractive.

The Chinese Internet ETF continues to rise, with all four Chinese Internet ETFs today seeing gains of around 2.5%. According to data, based on the profit expectations for 2023, the valuation of Chinese Internet stocks corresponds to a P/E ratio of 15.7 times in September 2023, 14.2 times in December 2023, and has already dropped to around 13 times by March 2024, reaching a low point.

At the same time, the Singapore iron ore futures price has achieved the largest two-day increase in over two years. Analysis indicates that this change is mainly due to the positive outlook for steel demand and production growth in China, the world's second-largest economy.

Gradual Disappearance of Attractiveness in U.S. Stocks

In a recent report, Hongze Research pointed out that the U.S. economic data is strong, expectations for interest rate cuts continue to be frustrated, and the attractiveness of U.S. risk assets, especially the gradual disappearance of attractiveness in U.S. stocks, is diminishing, reducing the risk-return ratio of investing in U.S. stocks.

As inflation expectations resurface, the market is facing a "collapse" in expectations for Fed rate cuts. Currently, the Fed funds futures December contract shows an expected rate cut of about 60 basis points for this year, while the expected rate cut for early 2024 is around 150 basis points As the expectation of interest rate cuts reverses, the US stock market is clearly showing a trend of "unable to rise": the Dow Jones Industrial Average fell by 2.3% last week, marking its worst weekly performance since March 2023. The S&P 500 Index fell by nearly 1% last week, the largest weekly decline since earlier in January.

Goldman Sachs data shows that hedge funds sold global stocks for the second consecutive week last week, driven almost entirely by short selling, making it the largest selling pressure from hedge funds since mid-January.

Wall Street News previously analyzed that the upward momentum of the US stock market this week will face a key test: first, whether overheated inflation data will once again stifle hopes of interest rate cuts; second, as the first quarter earnings season of US stocks kicks off, whether the profitability and prospects of companies can support the current high valuations.

Cost-effectiveness of Chinese assets begins to stand out

Morgan Stanley stated in its latest report that global funds are returning to the Chinese stock market, as some funds have eased their bearish sentiment towards the Chinese market, and the actions of global long-term investors withdrawing from Chinese stock markets (A-shares and H-shares) have hit the pause button.

Hongze Research pointed out in the report that compared to US stocks, the current investment cost-effectiveness of the Chinese stock market is higher, making the Chinese stock market more attractive, especially optimistic about H-shares.

Zhang Yidong, Chief Strategy Analyst at CICC, stated that Hong Kong stocks have experienced the "coldest winter of confidence", and high-probability assets may lead the "return of spring to Hong Kong stocks".

As of March 20, 2024, the risk premium of the Hang Seng Index relative to the yield of Chinese 10-year government bonds is 9.48%, near its high since 2008, and the risk premium of the Hang Seng Index relative to the yield of US 10-year government bonds is 7.50%. Compared to other major stock markets globally, as of March 20, 2024, the risk premium of US stocks is even negative, Japan's risk premium is only 2.76%, and Europe's risk premium is only 4.34%.

In addition to the risk premium of Hong Kong stocks, Zhang Yidong pointed out that compared to the valuation of representative stocks in Hong Kong and similar stocks in the US, Hong Kong stocks are significantly undervalued.

Taking the technology industry as an example, the PE valuations of Hong Kong stocks Tencent, Alibaba, JD.com, NetEase, and Baidu are in the range of 8-16 times, with PEG ratios between 0.7-2, while the PE valuations of US stocks Google, Microsoft, Facebook, and Amazon are in the range of 20-40 times, with PEG ratios between 1-2.

Several foreign institutions have recently released reports, unanimously pointing out that as the Chinese economy continues to recover, overseas liquidity tightening eases, cross-border investment and financing become more convenient, and corporate governance gradually improves, Chinese assets will attract more and more foreign capital Recent macroeconomic data in China shows that the Chinese economy is forming a potential bottom, with China's manufacturing PMI index returning to expansion territory for the first time in 6 months in March. The services PMI also hit its highest level since June, while one of the factory indices in the S&P Global PMI reached a 13-month high.

According to the latest data from HSBC, over 90% of emerging market funds are increasing their holdings in the Chinese stock market. In February and March this year, global investors have been net buyers of mainland Chinese stocks through the Stock Connect for two consecutive months, a situation last seen in June and July last year