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China's stock rally isn't over — and the nation could have the perfect cocktail of ingredients to stage a monster run-up over the next year, according to one Wall Street forecaster.
Jeff deGraaf, the CEO of Renaissance Macro Research, says he sees China's benchmark stock index climbing to 6,000 over the next year. That implies a 54% increase from the CSI 300's current levels, thanks to the right mix of conditions in Beijing that should power equities higher, he told Bloomberg on Friday.
"Skepticism, valuation, stimulus, momentum and a trend change," deGraaf said of China's investing environment, adding that it was "one of the best set-ups" he's seen over his 35-year career.
Chinese stocks have been on a roller coaster in recent weeks after Beijing announced its latest monetary stimulus package, which included lowering interest rates and pumping the stock market with $114 billion. The package sparked the steepest rally in Chinese stocks since 2008 before it quickly fizzled, a sign investors were disappointed Beijing didn't announce more stimulus measures.
Markets, though, are expecting the nation to announce a fresh fiscal stimulus package at a briefing on Saturday, potentially reviving the bull case for stocks. Most investors expect China to add 2 trillion yuan, or $283 billion, in fiscal stimulus through 2025, according to a Bloomberg poll of market participants.
"We see the policy response as self-preservation, a reaction to the weakness and a potential Mario Draghi-esque 'Do what it takes' moment for China," deGraaf said, later urging investors to "keep stops in place" when betting on Chinese stocks.
Other traders on Wall Street have shown interest in buying the dip in Chinese equities, despite fear that Beijing's economic slowdown could stick around.
Investors poured a record $39.1 billion into Chinese stock funds in the week ending October 9, according to EPFR Global data cited by Bank of America in a note.
"We buy any China dips," BofA strategist Michael Hartnett wrote in a note. Stimulus efforts will continue to "be used aggressively to boost domestic animal spirits and demand," he added.
Additionally, the Shenzhen Huaan Hexin Private Investment Fund Management Co., a Chinese hedge fund up 800% since 2017, also says it's buying the dip in technology stocks listed in Hong Kong. The Hang Seng Index has dropped 3% over the last five trading days, but is still up 27% from levels at the start of the year.
"Such a correction is more like a buying opportunity," Yuan Wei, the fund's founder, said in an interview with Bloomberg this week. "If you compare to their fundamentals, the stocks remain very cheap."
China's onshore market has a 50% chance of starting a new bull run, as opposed to a short-term bounce, and the bear market in equities should be over by now, Yuan said.
"The market is just rebounding from an extremely bearish level to a level that's still undervalued," he later added.
Other strategists on Wall Street have made bullish calls on Chinese equities in recent weeks, with eyes on continued stimulus measures in Beijing. Goldman Sachs predicted China's stock market could rally another 20%, thanks to "more substantial policy measures" and Chinese stocks being oversold, strategists said in a note.
