Positivity on Chinese equities – a consensus call amongst private banks – is being tested as the rally has taken a pause in recent weeks. Hard data will be required to confirm the optimism and push the market higher, according to J. Safa Sarasin’s Karsten Junius.

Being overweight on Chinese equities is now a consensus call amongst private banks as the world’s second largest economy has been gearing itself for a recovery driven by the headline reopening. But since rebounding from the lows in October, the rally has taken a pause this month.  

«Initial enthusiasm on China is gone. I have the impression that the market is waiting for hard data to confirm all this euphoria,» said J. Safra Sarasin’s chief economist Karsten Junius during a briefing attended by finews.asia.

«Unfortunately, hard data is only coming with a delay and maybe the market’s getting impatient.»

Story Intact

Nonetheless, J. Safra Sarasin remains positive on Chinese equities in the longer term, noting that there are signs that the reopening story remains intact. 

Examples include growing figures in box office sales and daily tourism, though the market will want to see similar performance in broader figures like retail sales, industrial production and exports. 

Equities: More Downside

Outside of China, as well as emerging markets, Junius is less optimistic on stocks – the bank is underweight on the overall asset class – adding that they «haven’t fallen enough» despite the ongoing downturn. 

According to J. Safra Sarasin, valuations are not cheap, despite a price reduction of around 20 percent, as the environment has fundamentally changed. Under the assumption of a negative correlation between real bond yields and price-to-earnings ratios, the bank expects more headwinds for equities. 

Bonds Are Back

Also similar to industry peers, J. Safra Sarasin is overweight on fixed income due to the new levels of yields resulting from higher interest rates. The bank is positive not only on developed markets but also on emerging markets where many policy rates are peaking, creating attractive opportunities for certain local currency bonds. 

«We are getting bond yields that we did not even dare to dream of just 12 months ago,» Junius added. «There’s no point in staying overweight cash in this environment. It was a good strategy for last year but it’s not a good strategy anymore.»