Why is Jefferies’ Chris Wood bullish on Chinese stocks? | Market News

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Chris Wood increased exposure to Japan in his Asia Pacific ex-Japan relative return portfolio by 2.5 percentage points, maintaining a “neutral” weighting.

Chris Wood

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Puneet Wadhwa New Delhi

Christopher Wood, global head of equity strategy at Jefferies, has become bullish on Chinese stocks and believes China is currently the focus of emerging stock markets.

He increased the exposure to Japan in his Asia Pacific ex-Japan relative return portfolio by 2.5 percentage points, maintaining a “neutral” weighting. The increased exposure was funded by reducing the weightings to Indonesia and South Korea by 1.5 and 1 percentage point, respectively, Wood said.

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Wood said China benefited from a correction in other markets and further gains in Shanghai, posting its biggest monthly outperformance among Asia (ex-Japan) and emerging markets (EM) in April since December 2022.

“The Chinese stock market rally could continue and could see further outperformance on a relative basis, especially if other markets correct again due to a lack of Fed easing concerns,” he said in his latest weekly “GREED & fear” note to investors.

Meanwhile, the MSCI China outperformed the MSCI Emerging Markets Index and the MSCI AC Asia ex Japan by 6.2% and 5.3%, respectively, in April, while the MSCI Emerging Markets ex China Index fell 1.8%.

As for Shanghai A-shares, the Shanghai Composite Index rose 2.1% in April and is currently up 18.7% from its low on February 5th.

Wood said this strong performance led the company to increase China’s weighting in its Asia Pacific ex-Japan relative return portfolio.

However, in US dollar terms, MSCI China is still down 54% from its peak recorded in February 2021. After the recent market rally, MSCI China was trading at a price-to-book ratio of 1.16 at the end of April, compared with its peak of 5.33 in October 2007.

“Jefferies’ quantitative strategy team’s price-to-book model suggests that if history since 2002 repeats itself, MSCI China could rise a further 35.4% over the next 12 months from end-April levels, giving it a nearly 100% probability of delivering positive returns,” Wood said.

Share buybacks and dividend payments

Wood believes the China bull market is more tactical than structural: “The strength of China’s dividend stocks and the bull market in long-term government bonds are driving the growth of persistently high real interest rates, even if they are heavily discounted, because they are self-evidently deflationary,” he said.

The surge in Chinese stocks over the past few months has also seen a steady increase in share buybacks by Chinese companies. According to reports, Chinese A-share companies bought back RMB 73.2 billion worth of their own shares in the first four months of this year, up from RMB 21.4 billion in the January-April period of 2023.

“MSCI China’s total dividend payout ratio (dividends plus share buybacks) is currently around 42%, the highest since 2010, while the proportion of companies conducting share buybacks has also risen to a 12-month record high of 34.4% as of the end of April,” Wood said.

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