BofA warns of an early correction in Chinese stocks - a repeat of 2015?

China's stock market could face a "significant correction in the near term", warn analysts at BofA Securities. The similarity to the sharp rise and subsequent fall in 2015 suggests a potential risk for investors.

According to strategists led by Winnie Wu, the Hang Seng China Enterprises Index (HSCEI) and the MSCI China Index have risen by more than 30% since mid-January, a growth rate similar to 2015, when the market subsequently experienced a drastic decline. The HSCEI index peaked then in May 2015, but had lost almost 50% of its value by February the following year and has not yet reached the highs of that time.

"There are quite fundamental similarities between the current cycle and the situation a decade ago, including the economic transition and the political cycle," the analysts said. "However, growth driven only by expansion can be vulnerable."

BofA $BAC's cautious approach contrasts with the wave of optimism that has swept Chinese markets this year. DeepSeek's technological advances and Beijing's determination to boost economic growth have led to a reassessment of Chinese stocks that were previously overlooked by global funds. Waning faith in US economic exceptionalism has also prompted investors to take a greater interest in the Chinese market.

According to BofA, investors targeting long-term positions in Shanghai are starting to worry about employment stagnation, deflation and weak credit demand. Geopolitical risks also remain overlooked. Moreover, some investors point to possible emerging bubbles in some technology sectors.

On Wednesday, the HSCEI index fell as much as 0.9% before erasing the losses. The MSCI China was similar and still holds a more than 23% gain since the start of the year.

In a January analysis for 2025, Wu and her team suggested that the worst of the period of falling valuations and capital outflows from Chinese stocks is over. By contrast, in the September report, they warned of low investment conviction but also showed more optimism about market growth. The MSCI China then gained another 13% before peaking on October 7.

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Source: Yahoo Finance