Mark Mobius says it’s not too late to buy into the rally in Chinese stocks.

The executive chairman of Templeton Emerging Markets Group predicts the nation’s equity market will climb another 20 percent, following a 19 percent surge in the Hang Seng China Enterprises Index (HSCEI) since March 20. Mobius, whose $12 billion Templeton Asian Growth Fund has outperformed 94 percent of peers this year, favors state-owned banks and energy companies because of their cheap valuations and the government’s plans to open up state-dominated industries.

An extension of the rally would give investors another chance to profit after they pulled almost $700 million from U.S. exchange-traded funds tracking China stocks since the advance started, the biggest outflows among emerging marketstracked by Bloomberg. Chinese shares are rebounding as policy makers accelerate spending and loosen some banks’ reserve requirements to keep economic growth from slipping below their 7.5 percent annual target.

“Usually when you enter a phase like this, you’re looking at at least 20 percent upside” from current levels, Mobius, 77, who oversees more than $40 billion in emerging markets, said in an interview yesterday in Hong Kong. “If you look at the valuations of SOEs, you’ll see that they are very cheap.”

The Hang Seng China index rose 1.1 percent yesterday to the highest level since Dec. 18 after a private gauge of manufacturing in the world’s second-largest economy increased to an 18-month high. Policy makers have accelerated infrastructure spending, cut reserve-requirement ratios for some lenders and allowed some local governments to loosen property curbs as a slumping real-estate market threatens to derail economic growth.

David Fuller's view

There are plenty of people who disagree with this view, also quoted in the article above, so who is right?

The bears have been right, with the exception of a few consumer sectors such as healthcare.  However, China’s broader market valuations are very competitive.  Crucially, the technical action is swinging in favour of Mobius’ view.  You can see this from the Hong Kong Hang Seng Index’s break above prior resistance near 24,000 today, this time with more underlying support to extend the advance. 

However, for this to be maintained we also need to see China’s Shanghai A-Shares Index (weekly & daily) also move higher.  It shows evidence of base development this year, with more upward than downward dynamics on the daily chart.  Also, we can now see recent evidence of higher highs in addition to higher lows.  This indicates that demand is now gaining the upper hand. 

As with India up until a few months ago, investors have shunned China, albeit for very different reasons.  There is a good possibility that we will now see a sharp rally, rather than yet another upside failure. 

(See also yesterday’s comments on China.)