Many analysts are bullish on Chinese stocks right now after equities surged following a pledge by Beijing to back Chinese companies with a fresh stimulus package. It comes amid fears of a deflationary spiral in the Chinese economy, which is suffering from falling consumer spending and an unravelling property crisis. The announcement injected positivity in the markets, with Goldman Sachs revising their forecasts and telling investors Chinese stocks could surge as much as 20 per cent as a result. However, others have raised doubts over the sustainability of the planned intervention – and over whether Beijing’s stimulus package is more sound than fury.

Is the Chinese stock market headed for a slump?

The SEE index is up more than 18 per cent over the last month, closing at 3,217.74 on Friday, October 11. Despite a midweek plunge, the index remains well up on the year to date. However, the CEO of the deVere Group, Nigel Green, has issued a warning to investors about the sustainability of the rally. Commenting on Tuesday, Mr Green said:

“Chinese stock is booming right now and yet Goldman Sachs say it has got another 20 per cent upside. I have my doubts.

“If you look at the Chinese stock market you will see that it is reliant on government stimulus. Is it really going to be everything that it is claimed to be?

“My opinion is it is the right direction but it is not yet enough. The government are investing six trillion yuan, that’s a lot of money, but it will require an incredible investment to turn the Chinese economy around.

“So, whilst I agree, Chinese stock was undervalued, I actually think this run has got maybe some more legs, but there’s not enough stimulus to keep it going.”

Mr Green’s comments came ahead of Beijing’s ‘big unveiling’ on Saturday when it left investors disappointed by the lack of clarity around its much-vaunted intervention. Reuters reported that Saturday’s announcement was “[B]ig on intent but low on the measurable details that investors need to ratify their recent return to the world’s second-biggest stock market.”

Speaking to the outlet, Huang Yan, an investment manager at a Shanghai-based firm, complained that: “The strength of the announced fiscal stimulus plan is weaker than expected. There’s no timetable, no amount, no details of how the money will be spent.”

Even the South China Morning Post, whose editorial stance has in recent years come into closer alignment with the perspective of Beijing, admitted that ‘investors were left disappointed’ after the Chinese Ministry of Finance failed to deliver enough details of the plan during a one hour press conference.

While the government didn’t set out exactly how much cash it would spend on the programme, it did announce other support measures, including raising debt ceilings and some cash support for the property sector. The disappointment risks provoking a fresh slump in Chinese stocks, just days after last week’s historic one-day fall which was similarly fuelled by Beijing’s failure to put its money where its mouth is.

Speaking to The Guardian, Richard Hunter of Interactive Investor blamed Wednesday’s fall on the failure to follow up the stimulus announcement with any specific actions from the authorities, or indeed further plans.” And in Saturday’s press conference, policymakers appear to have put on a repeat performance.

Reasons to be bullish about China

Despite recent volatility and disappointments over the precise form of China’s stimulus package, some analysts remain bullish on Chinese stocks. Research firm Renaissance Macro has forecast that Chinese stocks are set to grow by more than half next year. CEO Jeff DeGraff told Bloomberg that in his 35-year career, he had never seen such good conditions for a lengthy rally as in China right now.  However, he did warn that investors ought to: “keep stops in place and don’t get dogmatic.”

At the same time many investors are looking at Wednesday’s dip as a buying opportunity, rather than as an omen. Some investment firms and analysts maintain that Chinese stocks have strong fundamentals and remain undervalued, with one Chinese investment firm now predicting a 50 per cent chance China begins a sustained bull run.

However, the case for a sustained bull run may be stubbornly resisted by the reality of the Chinese economy. Youth unemployment is now approaching 20 per cent, its property market appears irretrievable and forecasters say China will miss its 5 per cent growth target this year.

Diversification is key

Whatever your view on how the situation in China will unfold – always remember not to keep all your eggs in one basket. Maintaining a diverse investment portfolio is crucial for mitigating risk and enhancing long-term returns. A diversified portfolio spreads investments across various asset classes, such as stocks, bonds, real estate, and commodities, which helps protect against market volatility. If one asset underperforms, gains in other areas can offset the losses, providing a more stable overall performance.

Diversification also allows investors to capitalise on different market opportunities. Different asset classes react differently to economic conditions. For instance, during an economic downturn, bonds might perform better than stocks, providing a safety net. On the other hand, during periods of economic growth, equities can offer higher returns. By balancing a portfolio across various sectors, industries, and geographies, investors can better navigate market fluctuations.

Moreover, a diversified portfolio encourages long-term thinking. It prevents overexposure to any single asset, reducing the reaction to short-term market movements. This approach promotes disciplined investing, where decisions are made based on long-term goals rather than immediate trends or market sentiment. In short, going ‘all in’ on the latest hot trend may result in an investor being burned.

Is there an opportunity in China right now?

Right now, Chinese equities are in a volatile place, and there is little consensus over where they will land. Their fortunes will be tied to the shape and scope of China’s stimulus package, which for the moment, remains an unknown. While some forecasters remain optimistic, investors should remain cautious in the face of uncertainty. Remember to always seek professional advice before making any investment decision.