Too early to bet on a rebound in China stocks- Alpine Macro

Investing.com-- Chinese stocks are unlikely to see a sharp rebound in the near-term, Alpine Macro analysts warned, citing growing concerns over a sluggish growth outlook and laggard policy support from Beijing.

The investment research firm warned that China’s economy was grinding down gradually in a “slow-motion implosion,” with soft private spending and a lack of immediate action by policymakers likely to exacerbate this trend.

China’s Shanghai Shenzhen CSI 300 and Shanghai Composite indexes both sank to more than six-month highs in recent sessions amid persistent concerns over a slowdown. Chinese bourses have also largely struggled to keep up with their Asian peers as foreign investors grew more cautious towards the country.

“The overall stock market appears to be bouncing around a broad bottom, but a major breakout is unlikely unless the government starts a large-scale stimulus program, which does not seem to be in the cards,” Alpine Macro analysts wrote in a note dated to Tuesday. 

Alpine Macro flagged a “disturbing” deterioration in money and credit figures in the country, indicating weak private and business spending. The investment firm said policymakers were downplaying the warning signals, and that recent bond issuances by the government, to address funding shortfalls, had also fallen behind. 

“It is now almost impossible for Beijing to achieve its 5% GDP growth target for 2024. In fact, if history is any guide, the contraction in monetary aggregates heralds a drastic deceleration in economic growth going forward,” Alpine Macro analysts wrote. 

China's economy grew less than expected in the second quarter, missing the government's 5% target as private spending faltered while deflation persisted.

Alpine Macro compared China’s slowdown to a stagnation seen in the Japanese economy since the early-1990’s- a stagnation that the country is still struggling to break out of. Beijing appeared to be making the same mistakes that Japan made in the 1990’s, where the government dragged its feet in rolling out counter-cyclical measures. 

Alpine Macro said with regards to Chinese stocks, it planned to hold onto its long positions, and that falling interest rates should provide some boosts to local markets. But the firm warned there was “no case for a sustained bull market” in China, unless the government rolled out drastic measures.

Still, based on a similar trend seen during Japan’s “lost decade,” Alpine Macro said Chinese value stocks should outperform even as growth deteriorates. But the firm recommended a defensive stance for Chinese portfolios.