Chinese stocks may be ready to face more back.
Goldman Sachs Group lowered its earnings per share estimates for China MSCI Index amid US-China trade frictions and lower potential for valuations to rise, while JPMorgan Chase & Co says investor flows show that the country’s stocks are currently overloaded.
According to strategists: Positioning measures, including margin transactions, suggest that used institutional investors, such as hedge funds, rather than retail ones, are more likely to have been responsible for this year’s rally in Chinese offshore equities. . There has been a sharp increase in long net positions from prospective investors this year, according to strategists.
Estimated EPS growth in China MSCI Index for 2019 will be 6% from 8% and in 2020 9% from 10%, Goldman strategists led by Kinger Lau wrote in a note on Saturday. This is like a market-anticipated opportunity for a trade resolution to fall to 12%, and Goldman’s economists no longer expect a trade deal before the US presidential election in 2020.
“The Chinese capital market currently looks quite overcrowded especially compared to last year,” the report said.
Chinese stocks enjoyed a sharp surge early in the year, with the MSCI China gauge gaining 23% from early 2019 to early April after fears of an economic downturn eased and the People’s Bank of China released some policy measures.
While China’s equity capital stocks, the yuan appear to be overstretched, JPMorgan said, citing a steady increase in long-term dollar / yuan short positions since mid-2018. Strategists also noted that Chinese offshore bonds should benefit from rising expectations for lower rates from the People’s Bank of China in an escalating scenario.
Strategists said: “FX investors have been preparing for a Chinese currency depreciation for some time.” So, from an investor positioning perspective, Chinese offshore equities look more vulnerable than the Chinese currency if the trade war of US-China escalates further from here./investing