Is it finally time for Chinese stocks?

In recent years, the Chinese stock market has been one of the biggest disappointments for many investors. But now it looks like this may be changing. This week, the market has reacted very positively to a series of economic stimuli from the government in Beijing. These measures have been implemented in an attempt to stimulate growth after recent weak economic data and to stabilise the ailing property market. The Chinese stock market has risen by around 15% during the week.

The stimulus package, which is the largest since the pandemic, consists of a combination of monetary easing and stock market support. On the monetary policy front, we see lower key interest rates from the Chinese central bank and a lowering of bank reserve requirements. The property market is being supported by lower down payment requirements and a reduction in mortgage rates. Meanwhile, the stock market received support in the form of a $114 billion loan pool from the central bank that companies can use to buy back their own shares. And there may be more to come.

The government's actions may seem modest compared to the total value of the Chinese stock market of around $15,000 billion. Yet they have created a 'FOMO' mood among investors who are now rushing into the market for fear of missing out on potential returns. This is compounded after a period where investor sentiment in the Chinese market has been at rock bottom. After years of underperformance, many institutional and retail investors have turned their backs on Chinese equities. But now that the market is showing signs of positive momentum, many are trying to make up for their underexposure.

The lack of popularity among investors so far and the market's perennial underperformance make the Chinese stock market one of the cheapest in the world. Share prices are relatively low compared to companies' underlying earnings. The valuation with a Price/Earnings multiple of around 10x compares favourably with the more expensive US (21x) and European (15x) markets.

The low pricing and depressed investor sentiment so far mean that the positive news and the fresh stimulus package have had an extra impact - precisely what we see playing out this week. If momentum and investor sentiment really do turn around, there is potential for further price increases, given the Chinese market's historical valuation.

However, it's important to remember that while recent moves have created positive momentum, it may prove to be temporary. The Chinese economy still faces significant structural challenges, including an ailing property sector. In addition, consumers are struggling as many are deeply invested in the depressed property market, while still battling high real interest rates and high youth unemployment.

Challenges in the Chinese economy may be part of the reason why Danish retail investors don't have their eyes on China. eToro's latest Retail Investor Beat survey from the third quarter shows that only 8% of retail investors are invested in the Chinese stock market.

However, for the long-term investor looking to diversify their portfolio across multiple economies, Chinese equities could potentially be an interesting option. It provides exposure to an economy that, despite current challenges, is expected to grow faster than most Western economies while offering low valuations. At the same time, the lower correlation with the US and European markets could also add some risk diversification to the overall investment portfolio.

eToro Market Analyst, Jakob Westh Christensen