New stance: People pass a Nomura office in Tokyo, Japan. The company’s analysts are optimistic the trade truce will draw more investors to Chinese shares. — Bloomberg
Tokyo: Nomura Holdings Inc strategists have upgraded Chinese stocks to a “tactical overweight”, saying the trade truce between the United States and China is a significant positive for the Asian nation’s equities.
“These developments should reduce the US-China geopolitical risk premium that has been associated with China stocks,” strategists led by Chetan Seth wrote in a note yesterday.
Valuations remain attractive and there’s scope for some global investors to return, they added.
The change in Nomura’s stance from “neutral” follows the better-than-expected de-escalation of trade tensions between the United States and China after discussions over the weekend.
The United States on Monday said it would reduce levies on most Chinese imports to 30% for 90 days, while China’s duties on US goods will drop to 10%.
President Donald Trump also said Asia’s largest economy has agreed to remove non-tariff barriers on imports.
The deal removes an overhang and analysts are becoming increasingly optimistic that the trade truce will help drive more inflows into Chinese shares.
Local markets had been on a positive path leading up to the talks over last weekend, with shares getting an earlier boost from an interest rate cut last week and policymakers’ pledge to support efforts by the so-called “stock stabilisation fund”.
The Chinese onshore benchmark pared gains of as much as 0.6% to trade little changed, as the reduction in tariffs lowered investors’ expectations for any large stimulus from China.
A gauge of Chinese shares listed in Hong Kong retraced some of the advances made on Monday, falling 1.8%.
Meanwhile, the yuan climbed to a six-month high in both the onshore and offshore markets yesterday after the People’s Bank of China set the currency fixing stronger than the 7.2 per US dollar level.
Nomura trimmed its “overweight” stance on India to fund the China upgrade.
It is the first major upgrade of China allocation by strategists since the world’s two largest economies agreed last weekend to a temporary reprieve in their trade war.
“Having both India and China equities as an ‘overweight’ will offer Asian equity investors a natural hedge in portfolios against any trade-related volatility,” the strategists wrote.
While markets have been expecting some reduction in tariffs, the outcome is much larger than expected and can bring a major relief for stocks globally.
Less than 10% of respondents in a recent survey by Nomura anticipated tariffs falling below 34%.
A reduction in the US-China geopolitical risk premium paves the way for the MSCI China Index to trade as high as 13 times one-year forward earnings, they wrote.
The gauge is currently trading at 10.9 times on that metric, according to data compiled by Bloomberg. — Bloomberg
