Hong Kong equities rallying since March after sharp drop in January

Although valuations look stretched currently.

It has been observed that China and Hong Kong equities have been rallying since March, after a sharp drop in January.

According to a research note from Deutsche Bank, this has been helped by better-than-expected macroeconomic fundamentals. China’s GDP growth remained resilient in H1 2016, growing 6.7% YoY versus a 6.8% increase in 2015.

At the same time, China’s August data looks solid, in line with a positive H2 2016 outlook. Industrial production was at a five-month high, supported by pharmaceuticals, motor vehicles and telecommunications/computers. Export growth also continued to be strong, partially helped by a weaker currency.

Here's more from Deutsche Bank:

Business confidence is also improving. According to the People’s Bank of China (PBoC) survey published on September 18, business confidence picked up for a second consecutive quarter in Q3 2016.

There is still some room for further rallies, despite the indices showing a few signs of fatigue. Both indices are lower compared to last year. At the same time, dividends are relatively attractive compared to developed markets and other Asian emerging markets.

Nonetheless, valuations look stretched at the moment. Any further rally in China and Hong Kong equities may therefore require earnings to improve. At
the same time, policy and economic uncertainty in the rest of the world represents a downside risk for equity markets in general.