Following a series of favorable policies from the Chinese government, Chinese stocks saw a remarkable surge last week. The SHCOMP Index soared by 15.7%, marking its strongest weekly performance since November 2008. Meanwhile, the Hang Seng China Enterprises Index recorded an 11-day winning streak, the longest since 2018.
Wall Street heavyweights have praised these developments, believing that the policies signify the Chinese government's commitment to supporting the economy, and that the upward trend in Chinese stocks is likely to continue. Stephen Jen, CEO of Eurizon SLJ Capital and the proponent of the "Dollar Smile Theory," recently joined this chorus of approval.
Jen projects that, driven by the recent stimulus measures, Chinese stocks will further rise, the yuan will appreciate, and Chinese bonds will decline. As of the market close on September 27 (last Friday), the ChinaBond Composite Index dropped by 0.49% in a single day, its largest daily decline since late 2016. Moreover, the main contracts of 30-year and 10-year treasury futures fell by 2.56% and 0.96%, respectively. Data indicated a net outflow of 36 billion yuan from various types of bond ETFs over the past week, showcasing the classic "seesaw" effect between stocks and bonds.
In his latest report, Jen emphasized that Chinese stocks are significantly undervalued and are poised for a major rebound. Last month, he suggested that with potential U.S. interest rate cuts, Chinese companies might sell off $1 trillion in dollar-denominated assets, likely leading to a 10% appreciation of the yuan. As inflation in the U.S. approaches the Federal Reserve's target and the economy achieves a "soft landing," Jen expects the dollar to depreciate against the euro, yen, and yuan.
In fact, following China's comprehensive stimulus measures, numerous investors, including hedge fund legend David Tepper (Trades, Portfolio), have expressed optimism about Chinese stocks. Tepper announced last week that he is fully invested in Chinese stocks, calling it the "buy everything" moment. Goldman Sachs also noted that the current rebound is different from past ones and less likely to fade quickly. Morgan Stanley predicts an additional 10% rise in the SHCOMP Index. A Bloomberg survey revealed that 8 out of 12 Wall Street investors believe this moment represents the turning point for a long-term rebound in Chinese stocks.
Jen added that with the Federal Reserve cutting rates, China intensifying its measures, and oil prices remaining low, risk assets should perform well. "I expect global stock markets to rebound strongly until the end of the year after the U.S. elections," he concluded.
