Chinese stocks are once again in the limelight today, as analysts debate how much farther the rally could run and as treasuries bounced after a blowout jobs report on Friday. Shares of the electric-car maker Li Auto(NASDAQ: LI) and data center operator GDS Holdings(NASDAQ: GDS) traded 2% and 1.5% higher, respectively. Meanwhile, the e-commerce company PDD Holdings(NASDAQ: PDD) had fallen nearly 2%, despite an analyst upgrade this morning.
Will the rally continue?
Since the Chinese government and central bank announced a broad range of stimulus initiatives, Chinese stocks have surged as hedge funds and other institutional investors bought the beaten-down sector. The Hang Seng index, which is composed of major Chinese stocks listed in Hong Kong, has now surged 34% over the last month.
The question among analysts is whether the rally can continue despite struggles in the Chinese economy, including high unemployment, a housing downturn, and weak consumer demand. The Chinese government is targeting 5% growth in gross domestic product this year, a target several economists and analysts have questioned.
GoldmanSachs believes the rally can continue, recently upgrading the sector to overweight. Goldman strategists estimate that Chinese indexes could have another 15% to 20% more to run if officials make good on their stimulus promises. Valuations are still compelling, and earnings could pick up, they noted.
Not all are in this camp, however. Analysts at Invesco and JPMorgan Chase are still not convinced that stimulus efforts will be able to lift demand and believe that additional measures would be needed. Plus, after this recent run, valuations are not as attractive.
According to Bloomberg, Raymond Ma, Invesco's chief investment officer for Hong Kong and mainland China, recently said:
There are a group of stocks whose share prices are up by 30% to 40% and almost at historical highs. Whether in the next 12 months the fundamentals will be as good as before their peak, that's more uncertain to me. That would be the category we would like to trim.
In company-specific news, analysts at Macquarie upgraded PDD Holdings this morning from neutral to outperform and significantly hiked their price target from $126 to $224. Analyst Ellie Jiang wrote in a research note that she's bullish on the Chinese internet sector, which only trades at half of the levels seen in the first quarter of 2023. Jiang also said that the sector has "materially better fundamentals" and "prudent corporate strategies, [which] enhances sector earnings visibility."
Many near-term factors
Despite Goldman's bullish call and the PDD upgrade, the rally had struggled to gain momentum approaching midday. There are still conflicting narratives, investors might be taking gains, and a blowout jobs report Friday has sent the 10-year treasury yield above 4%, which hurts most tech and growth stocks. Additionally, the U.S. presidential election is less than a month away and the outcome could broadly impact Chinese stocks.
Li, GDS, and PDD all have strong potential, especially on a long-term basis. However, in the near term, there are many questions -- including valuations, whether the Chinese government will deliver on stimulus promises, whether the stimulus is enough to boost the ailing Chinese economy, and what happens in the election.
For these reasons, I would tread cautiously and not take too big a position in any individual stock, or better yet, invest in a Chinese exchange-traded fund that offers more diversity. The environment may become more clear following the election.
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