Chinese stocks: What goes up... can go up more
The Chinese sharemarket has doubled in less than a year and some people are pondering whether we are nearing the peak of the cycle. Their view may be that what goes up, must come down, but that view is missing two key phrases: what goes up, can go up a lot more before coming down and can remain higher than today even when it does. This remains the case in China for three key reasons: Firstly, Chinese monetary policy remains restrictive as real rates are the second highest in all of the emerging markets and questions about growth and rising deflation risks point to more monetary easing and reserve requirement ratio cuts by the September quarter, which will be constructive for the sharemarket. Secondly, despite the sharemarket rally since July 2014, the Chinese market is not egregiously expensive relative to other markets. Thirdly, from an asset class perspective Chinese equities are also benefiting from the weak property market which has further downside risk and this has sparked a continuation in the switch from real assets to financial assets. (VIEW LINK)
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