Investing.com — China’s latest round of stimulus has sparked a strong rally in local stocks over the past few weeks, but MRB Partners said China’s earnings outlook remains weak, and it’s too early to upgrade local stocks.
MRB Partners said that the recent rise in Chinese stocks was mainly driven by “unrealistic expectations” of government stimulus, and that although the economic outlook for China was positive, this did not extend to corporate profits.
MRB Partners has a neutral weighting in Chinese equities with an upgrade bias within emerging markets.
But any upgrades for Chinese stocks “depend on a broad earnings rebound. There is no clear evidence of such a rebound,” MRB Partners wrote in a note.
The brokerage noted that the “fundamental outlook” for Chinese markets remains uncertain, even as optimism over stimulus sparked a recent rally in local stocks.
Chinese indices rose to their highest levels in two years after Beijing announced a series of monetary stimulus in late September. But stocks then fell sharply, and witnessed increased volatility as these measures disappointed investors who had held on to more targeted financial measures.
In response, China’s Ministry of Finance said it would hold a press conference over the weekend to explain plans for stimulus measures. But investors are skeptical about the scope of these measures, given China’s high debt levels.
“When you catch the dragon’s tail, expect a wild ride,” MRB Partners said, referring to recent volatility in Chinese markets.
The brokerage firm recommended maintaining Chinese stocks with a neutral weight in the emerging markets portfolio, noting that other emerging market markets outside China provided better returns. But MRB Partners noted that it still has a bias towards lifting Chinese stocks “as and when” the country’s earnings outlook improves.
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