Key findings
- China's stimulus measures announced Sept. 24 triggered a sharp market rally, with policy-supported industries and volatility and liquidity factors benefiting most from the swift liquidity injection and boost in sentiment.
- Global institutional investors, either using fundamental or quantitative approaches, may identify potential opportunities in sector rotation and in factors’ deviations from their long-term patterns.
- Investors will need to closely monitor policy effectiveness and progress to adjust their China strategic and tactical allocations and manage potential industry-group and factor opportunities and risks.
After the Chinese government announced significant stimulus measures on Sept. 24, the MSCI China, MSCI China A and MSCI China A 50 Connect Indexes have returned 21.6%, 26.1% and 24.4% in USD, respectively, as of Sept. 30.[1] These returns mark the largest five-day rally for these indexes since 2008, and on Sept. 30, total turnover in the China onshore market reached CNY 2.5 trillion (about USD 357 billion), an historic high that reflected the enthusiasm of market participants.
The new stimulus package signals a strong commitment by Chinese policymakers to stabilize the world's second-largest economy and equity market, and includes monetary stimulus, a mortgage-rate cut for existing home loans and creation of new monetary-policy tools to support the stock market.[2] The announcement was followed by an early Politburo meeting on Sept. 26, which emphasized stabilizing the property market and reviving the economy.
In light of these recent developments, investors may wish to consider adjusting their allocations to adapt to the new environment, while balancing the potential risks of the market's overreaction.
Most market leaders, on- and offshore, aligned with stimulus
An analysis of the Global Industry Classification Standard (GICS®)[3] industry groups shows that select consumer-staples, financial-services, real-estate, semiconductor and software industries have been the strongest performers in the MSCI China Index following the announcement. More-defensive industries, such as telecom services, banks, energy and utilities have been the biggest underperformers.
Within China A shares, select consumer-staples, financial-services and semiconductor industries have posted the best performance, while utilities, energy and banks have underperformed the most. The leading industries in both on- and offshore markets were generally aligned with the areas highlighted in the stimulus policies or were beneficiaries of significant improvement in market liquidity and investor confidence, such as the semiconductor and software industries.
Industry-group winners and losers vs. market since stimulus
Data during Sept. 24 to 30, 2024. Gross returns are in USD. Performance of the industry groups was calculated using the MSCI China Industry Group Indexes (compared to the performance of the MSCI China Index) and the MSCI China A Industry Group Indexes (compared to the MSCI China A Index).
High-volatility and liquid stocks led across China markets, while momentum lagged
To help investors understand the mechanisms behind the market reaction, we compared the performance of style factors over the five trading days ending Sept. 30 against their long-term trends. To some extent, factors' behavior echoed that of the industry groups.
Although factor behaviors have historically been different for on- and offshore markets, our analysis shows that the recent sudden reversal in market liquidity and sentiment boosted the performance of higher-volatility and more-liquid stocks in both markets. In addition, the short-term performance of some factors, especially momentum, deviated substantially from their long-term averages.
For offshore listed Chinese and Hong Kong SAR equities, the beta, short-term reversal and liquidity factors had the strongest positive returns, with beta and liquidity recording 3.8 and 4.1 percentage-point premiums, respectively, compared to their long-term annual returns.[4] In contrast, momentum's return was strongly negative, whereas its long-term annualized return had been notably positive. This suggests that offshore Chinese equities with higher volatility and liquidity have benefited the most from the near-term shift in market liquidity and sentiment. Consistent with this, liquidity, residual-volatility and momentum factors demonstrated meaningful reversals to their long-term return behaviors.
China's offshore and Hong Kong markets
Panel A. Short-term performance vs. long-term annualized return
Panel B. Deviation of factor performance from long-term average
Long-term performance was calculated using daily factor returns from October 2004 through August 2024.
For China A shares, beta, size and residual-volatility factors posted the strongest positive returns, while momentum posted large negative returns from Sept. 24 to Sept. 30.[5] These findings suggest that in the onshore equity market, higher-volatility and larger stocks benefited the most from the sudden injection of market liquidity. The size, liquidity, momentum, mid-capitalization and residual-volatility factors demonstrated meaningful reversals to their long-term return behaviors.
China A shares market
Panel A. Short-term performance vs. long-term annualized return
Panel B. Deviation of factor performance from long-term average
Long-term performance was calculated using daily factor returns from October 2004 through August 2024.
Longer-term market impact will hinge on policies' effectiveness
Past policy changes have significantly impacted Chinese equity portfolios through direct and indirect transmission channels. The long-term effectiveness of these new measures will depend on their implementation details and the reactions of market participants over the coming months. Although the new stimulus package was generally welcomed by the stock market, investors in Chinese equities will need to monitor the measures' progress and effectiveness in revitalizing the economy, especially the private sector, given the complex macroeconomic and political environment.[6]
1 Exchange-rate changes contributed to about 1.2% of the total returns of the MSCI China A and MSCI China A 50 Connect Indexes compared to the returns calculated in local currency.2 “China unveils fresh stimulus to boost high-quality economic development,” The State Council, People's Republic of China, Sept. 25, 2024, and Ji Siqi and Frank Chen, “Rally Cry by Xi sets economic priorities for China's officials, absolves them of mistakes,” South China Morning Post, Sept. 26, 2024.3 GICS is the global industry classification standard jointly developed by MSCI and S&P Global Market Intelligence.4 We used the Barra China International Equity Model for our analysis.5 We used the Barra China A Total Market Equity Model for Long-Term Investors for A-share analysis.6 “China's New Stimulus Plans Make a Splash in Global Markets,” Reuters, Sept. 25, 2024.
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