BofA Securities strategists noted that China’s stock market could be heading for a significant correction period after its recent surge, reminiscent of the boom and bust cycle seen in 2015, with both the Hang Seng China Enterprises Index (HSCEI) and the MSCI China Index having jumped by over 30% since hitting lows in mid-January.
The strategists, led by Winnie Wu, highlighted that in 2015, after reaching its peak in May, the HSCEI index plunged nearly 50% by February of the next year and has yet to recover to those heights.
Several underlying factors from a decade ago, such as economic restructuring and policymaking, appear to be repeating themselves. However, the rally driven by multiple expansions is potentially fragile.
This cautious outlook contradicts the strong optimism that has pervaded Chinese markets this year, pushing them to substantial gains. Innovations from companies like DeepSeek and the Chinese government’s push for economic growth have led to a reassessment of Chinese stocks, which global investors had previously bypassed.
Additionally, an eroding confidence in U.S. economic dominance has also shifted attention towards Chinese equities.
A growing unease among long-term investors in China was also mentioned, with concerns centering around stagnant job growth, deflationary trends, and weak credit demand. Moreover, BofA highlighted that there are apprehensions about potential bubbles forming in certain tech sectors.
On Wednesday, the HSCEI index initially dropped by as much as 0.9% before recovering most of the loss, while the MSCI China index showed similar movements and maintained a significant gain for the year.
Meanwhile, reflecting on an earlier 2025 outlook, Wu and her team suggested that the worst phase for Chinese stocks, in terms of de-rating and sell-offs, is over.
By September 27, 2024, the strategists acknowledged the lingering low confidence among investors but expressed greater optimism about the market rally. During this period, the MSCI China index climbed an additional 13%, reaching its peak on October 7.
