The near-term outlook for China’s equities could be quite positive

Investing.com -- According to analysts at Capital Economics in a note, despite near-term headwinds, the near-term outlook for Chinese equities “could be quite positive.”

The firm noted that it was a good day for Chinese stocks on Wednesday, “especially offshore, with the Hang Seng up over 2% and outperforming most others.”

However, they cautioned that the market still has a lot of ground to make up on equities elsewhere. In July, it seemed to have started making up that ground, but the momentum faded heading into August, despite there being no shortage of good news.

“We recently learned, for example, that [the delay of] higher US tariffs - due to take effect this week - had been extended for another 90 days. And China gained some clarity around access to advanced chips from Nvidia and AMD,” said Capital Economics, noting that the companies secured export licenses in exchange for sharing some revenue with the U.S. government.

Assessing the recent struggles of China’s stock market, the firm noted that a frequent problem in recent years has been periodic plunges in valuations, although that is not the issue at present.

According to Capital Economics, the current issue is in expectations for earnings. “Judging by analyst surveys, those have essentially stagnated since ’Liberation Day,” said the firm.

“It’s not surprising that tariffs have contributed to some nerves on this front,” stated the firm. “While we’re not ourselves hugely optimistic about China’s economy, our sense is that expected earnings are unlikely to be too much more of a drag on equity prices in the near-term.”

While the firm acknowledged that there are many other potential headwinds, it stated that its end-2025 equity forecasts, which were recently surpassed, may now be too conservative, and “further near-term gains may well be on the cards.”

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