"Chinese Stock Market Rebound Still Premature... Fundamentals More Important Than Stimulus Measures"

Taiwan Presidential Election in January Next Year as the Biggest Variable

[Image source=Yonhap News]

There is an analysis that it is still too early for the Chinese stock market to fully rebound. Inflation recovery remains slow, and the manufacturing Purchasing Managers' Index (PMI) has also declined, indicating an unstable recovery.

On the 30th, Shin Seung-woong, a researcher at Shinhan Investment Corp., stated, "The Shanghai Composite Index band for December remains at 2900-3400, reflecting a 12-month forward PER of 9.5 to 11.0 times." He explained that while price attractiveness exists below 3100, there is a lack of short-term drivers to accelerate capital inflow into the stock market.

China's inflation rate has recorded around 0% this year, raising concerns about deflation. In September, China's official manufacturing PMI exceeded the expansion baseline of 50 for the first time in six months, but fell below 50 again in October. In response, the Chinese government is △strengthening expansionary fiscal momentum through supplementary budgets, △implementing large-scale construction projects and supplying liquidity to the real estate sector, △and easing monetary policy through policy channels to stimulate the economy.

Researcher Shin analyzed, "Even with strengthened stimulus measures, if there is no substantial fundamental improvement, the stock market is likely to remain in a trading range without breaking out," adding, "While maintaining an optimistic view on the rebound of manufacturing conditions and inventory cycles next year, the key issue is the timing."

The biggest variable for the Chinese stock market is the Taiwanese presidential election scheduled for January next year. This is the most important political event that could shake relations between China and Taiwan, as well as China and the United States. Researcher Shin predicted, "If the pro-China or centrist opposition party succeeds in regime change, improvement in cross-strait relations can be expected; however, if the opposite occurs, it is necessary to be mindful of the possibility of renewed geopolitical risks."

Researcher Shin expects the period when economic momentum gains traction to be February to March next year, when the effects of expansionary fiscal policy spread. He judged that unless there are special variables, both the stock market and corporate profits are likely to remain sluggish until the end of the year.

He also evaluated, "In this phase, a style shift to consumer and sensitive stocks is difficult," noting that "profit momentum in sectors such as steel, chemicals, and construction is also slow to improve." He added, "Relative strength is expected to continue in sectors where demand is concentrated until the end of the year, such as the Huawei theme (semiconductors, handsets, mobility) and healthcare (strengthening momentum in new drug development like GLP-1)."