What happened:
While China is rolling out stimulus measures to revive the mainland economy, both investors and analysts have expressed disappointment over the lack of details and the limited size of the stimulus.
Some analysts and economists expect a fiscal package of 2-3 trillion yuan. I believe that any amount lower than 2 trillion yuan may not be sufficient to sustain the rally.
The $HSI(HSI)$ has corrected by 10%, falling from 23,099 on October 7 to 20,804 as of 1 p.m. on October 15.
What’s Next:
The $HSI(HSI)$ may trade sideways until after the U.S. presidential election on November 5, as I anticipate that any large-scale measures might be delayed until then.
The Chinese government could be holding back on a major stimulus package, likely waiting to assess whether the new U.S. president ramps up tariffs on China. After evaluating the economic impact of potential trade tariffs, China may then roll out targeted measures.
Hang Seng Index’s Target Price
Based on Fundamental Analysis:
Base-case scenario: The $HSI(HSI)$ may rise to 23,660 by mid-2025, returning to its 10-year average forward P/E ratio of 11.35x.
Best-case scenario: The $HSI(HSI)$ could rise to 25,255 by mid-2025, based on a forward P/E ratio of 12.12x, which is 0.5 standard deviation above its 10-year average forward P/E.
Based on Technical Analysis:
Base Case Scenario: 24,618 based on Fibonacci Extension.
Source: Tiger Brokers, 15 Oct 2024
Best Case Scenario:
The Double Bottom target price is 30,600 if the $HSI(HSI)$ closes above the Double Bottom neckline at 22,700.
Source: Tiger Brokers, 15 Oct 2024
The chart below shows a comparison of the Double Bottom patterns in 2009 and 2024.
Source: Tiger Brokers, 15 Oct 2024
Conclusion:
$HSI(HSI)$ rose too fast too furious. Initially, I thought it would take until the end of December for the Hang Seng Index to reach 22,000. However, it overshot my initial target and reached as high as 23,241 intraday on October 7. Therefore, a healthy correction is widely expected.
I still anticipate foreign funds flowing into the Chinese equity market to participate in this stimulus rally.
I expect the $HSI(HSI)$ to potentially pull back to the 19,000-20,000 range in the near term. However, whether or not there is a sustainable pullback, it is still likely to break above its October 7 high of 23,241 due to the rollout of further fiscal stimulus.
PDD ( $PDD Holdings Inc(PDD)$ ), Tencent ( $TENCENT(00700)$ ), Meituan ( $MEITUAN-W(03690)$ $MEITUAN-WR(83690)$ ), BYD ( $BYD COMPANY(01211)$ ), Hang Seng Index ETFs (3115 HK), and Hang Seng Tech ETFs (HST SP, HSS SP, 3032 HK, 3067 HK) are some preferred ways to gain exposure to the potential China market rally.
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