Asian Markets Poised for Strong Rebound as China Reopens, Retail Investors Gear Up for Rally

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Retail Momentum and Positive Sentiment Drive Optimism, But Global Skepticism Lingers Over Market Sustainability

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It will be interesting to see how the markets open tomorrow, especially given the momentum we've seen from Hong Kong during the holidays, where gains of 8-10% were recorded. This could signal that Asian markets will follow suit with a positive start. The China holidays gave foreign and offshore investors time to catch up with the bullish sentiment that had been driving the pre-holiday rally onshore.

I expect strong momentum in specific sectors, particularly China’s non-bank financials, as brokerage firms saw massive gains of 50-100% over just three days last week. Many of these stocks are dual-listed, so the price gap between onshore and offshore shares is likely to close once the Asia markets reopen. However, global managers remain cautious, with some even suggesting the potential for a crash. The sentiment gap between onshore and offshore markets is also reflected in the differing short positions.

Despite the rally in Hong Kong, there's still skepticism from global investors. This caution is apparent in the short balances, with onshore short positions dropping more quickly than offshore. The upcoming Northbound Stock Connect flow report will also offer insights into the level of foreign investment heading into China as we approach the end of Q3.

From an investor's perspective, there’s a dilemma—many missed out on the rally and now must decide whether to join in. Even after a 30% rebound, China equities remain undervalued compared to U.S. markets, trading at significantly lower forward earnings multiples than the S&P 500. This raises the question of whether there’s still opportunity for further gains.

China, being the world’s second-largest economy, holds the potential to shift global markets, impacting even the Federal Reserve’s rate decisions. It's a major player, and ignoring its influence, particularly in this recovery phase, is difficult, as China has the power to alter the global investment landscape in a sudden and significant way.

As for tomorrow’s reopening, expectations are high, especially among retail investors who may not need concrete fiscal packages but will likely respond to positive rhetoric from the Chinese government (发改委）. If the tone is optimistic, we could see another strong rally, fueled by retail investors who drive much of China’s market momentum. However, concerns remain about the system’s ability to handle the expected surge in activity after the Shanghai exchange's recent technical issues.

Volatility is expected to be significant, so it's essential to remain steady and avoid being shaken out. Only invest what you can afford to lose.

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