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(Bloomberg) — The way Jeff deGraaf sees it, hedge funds that sold a record amount of Chinese shares earlier this week toward the end of the CSI 300’s 10-day, 35% surge are in for a world of regret.
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In fact, says the co-founder and chief executive officer of Renaissance Macro Research, rarely in his more than three-decade Wall Street career have the stars aligned so perfectly for a lengthy rally.
“Skepticism, valuation, stimulus, momentum and a trend change,” they’re all there, he said in an interview.
It’s because of that backdrop that the Lehman Brothers and Merrill Lynch veteran is now one of the biggest China bulls on Wall Street. He predicts the country’s benchmark gauge will hit 6,000 in the next 12 months, a more than 50% advance.
DeGraaf, who ranked as the top technical analyst in Institutional Investor’s annual survey for 11 straight years through 2015, says that it’s no coincidence that Beijing rolled out its most aggressive monetary easing in years as equities tested their year-to-date lows last month.
“Markets drive policy as much as policy drives markets,” he said.
His forecast compares with Morgan Stanley’s newly revised CSI 300 target of 4,000 by June 2025, implying virtually no upside from Thursday’s close.
The index plunged 7.1% on Wednesday, the second day mainland markets reopened after the Golden Week holidays. While it rose 1% Thursday, enthusiasm over a stimulus-driven equity surge is cooling due to the lack of any further major initiatives at a key policy meeting earlier this week.
DeGraaf recommends investors “keep stops in place and don’t get dogmatic” when wagering on China.
For now, traders are awaiting the outcome of a finance ministry briefing on fiscal policy due Saturday.
“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.
The former Lehman chief technical analyst also downplayed potential risks to Chinese shares from the upcoming US presidential election.
It’s a “side show, probably doesn’t matter much, and a reaction would be an opportunity,” he said.
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