China stocks ‘riding the dragon’s tail’ amid stimulus swings- MRB Partners

Investing.com– China’s recent round of stimulus sparked a strong rally in local stocks over the past few weeks, but MRB Partners said that China’s earnings outlook still remained muted, and that it was too soon to upgrade local stocks.

MRB Partners said China’s recent stock rally was driven chiefly by “unrealistic expectations” of government stimulus, and that while China’s economic outlook was positive, this did not extend into corporate earnings.

MRB Partners holds a Neutral weight on Chinese equities with an upgrade bias within emerging markets.

But any upgrades to Chinese stocks are “predicated on a broad-based earnings recovery. No evidence for such a recovery is yet apparent,” MRB Partners wrote in a note. 

The brokerage noted that the “fundamental outlook” for China’s markets remained uncertain, even as optimism over stimulus sparked a recent rally in domestic stocks.

China’s Shanghai Shenzhen CSI 300 and Shanghai Composite indexes rallied to two-year highs after Beijing announced a slew of monetary stimulus in late-September. But stocks then fell sharply, experiencing increased volatility as the measures disappointed investors holding out for more targeted, fiscal measures.

In response to this, China’s finance ministry said it will hold a briefing over the weekend to outline plans for stimulus measures. But investors are doubtful over the scope of the measures, given China’s elevated debt levels.

“When you grab the dragon’s tail, expect a wild ride,” MRB Partners said, noting the recent volatility in Chinese markets. 

The brokerage recommended holding China stocks at a neutral weight within an EM portfolio, stating that other EM markets outside China offered better returns. But MRB Partners noted that it still had a bias towards upgrading Chinese stocks “as and when” the country’s earnings outlook improved.