JP Morgan: Chinese stocks can still rise! Increase positions in May, then wait patiently!

The recent strong rebound of A-shares has prompted major Wall Street banks to reassess the outlook for the Chinese stock market. Bank of America Merrill Lynch stated that "the worst period is over", while Goldman Sachs continues to be bullish on the Chinese stock market, predicting that the valuation of listed Chinese companies could increase by as much as 40% in an optimistic scenario.

JP Morgan has gone as far as to call out Wall Street, stating that they significantly increased their holdings of Chinese stocks in May and are patiently waiting for the economic recovery to accelerate.

JP Morgan's analyst team, led by Wendy Liu, stated in a report released last week:

According to EPFR data, as of the end of March, global, global (excluding the US), emerging markets, and Asia (excluding Japan) funds' holdings of Chinese stocks were lower than their respective MSCI benchmark indices by 1.8%/4.8%/3.3%/7%.

EPFR data shows that every time these four types of funds reduce their underweight relative to the MSCI benchmark by 25 basis points, there will be a net inflow of 284 billion RMB (approximately 39.2 billion USD) into the Chinese stock market.

From February to April this year, the MSCI China Index achieved its best three-month return since its opening, with the P/E ratio revalued from 8.9 times at the end of March to the current 9.7 times, an increase of 9.3%.

JP Morgan stated that China is already in the early stages of recovery, with positive signs shown in government policies and market dynamics, while other countries are facing more challenges in the late stages of recovery. The institution predicts that the next peak of China's expansion cycle may come in the first half of 2025.

As the economy accelerates its recovery, JP Morgan expects the forward P/E ratio of the MSCI China Index to increase, further driving the EPS (earnings per share) of the index to grow between 2024 and 2025.

JP Morgan predicts that the EPS annual growth rates of the MSCI China Index and the CSI 300 Index in 2024 will increase from 10% and -3% in 2023 to 14% and 15%, respectively Morgan Stanley pointed out that in addition to the improvement in profitability, positive factors such as improvement in shareholder returns, capital market reforms, real estate market support policies, optimistic investor expectations, and the return of foreign capital will all support a rebound in the Chinese stock market.

Morgan Stanley recommends paying attention to corporate earnings and real estate data in the first quarter of 2024. According to IBES data, out of the 11 GICS industries in the MSCI China Index, 5 industries have reversed the downward trend from last year and achieved positive growth in the first quarter. The institution also has similar predictions for the performance of the CSI 300 Index.

Morgan Stanley'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, indicating that there is still nearly 7% upside potential for the CSI 300 Index within the year.

It is worth noting that the Morgan Stanley report pointed out that the Chinese real estate market has shifted from a growth phase to an adjustment phase. Despite significant challenges, demand for improved housing may still support the real estate market until 2026-2027.

The report states that according to United Nations population data projections, the population aged 35 to 65 in China is expected to increase from 622.9 million in 2023 to 642.9 million by 2025.

With the increase in the population aged 35 to 65, a relatively stable demand for upgrades is expected, as this group may seek better living conditions, thereby driving the demand for improved housing market.

There is a certain amount of unsold completed and under-construction residential housing inventory in China. The increase in demand for improved housing can help absorb this inventory, providing support to the real estate market for a period of time. Morgan Stanley predicts that demand for improved housing may support the real estate market until 2026-2027.

Furthermore, according to United Nations population data, the main group of property owners in China 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 the real estate market during the transition period