(Bloomberg) -- The rebound in Chinese stocks is set to extend as the gains spread to segments that have trailed the market recovery. 

The 29% surge in the MSCI China Index since a January low has pushed about half of its members above their 200-day moving averages, data compiled by Bloomberg show. That’s been a good omen in the past, with the proportion usually widening to 80% over the next few months.

The broadening of the rally will signal greater investor confidence in Chinese shares after cheap valuations and Beijing’s policy support helped push gauges higher. Separate analysis of China’s market cycles by HSBC Holdings Plc. and Goldman Sachs Group Inc. show that the gains may continue in the coming months.

“Comparing to the previous year, we have seen market breadth improvement, which is a good environment for bottom stock-picking focused on fundamentals across broad sectors,” said Wenchang Ma, a portfolio manager at Ninety One Hong Kong Ltd.

Consumer technology and financial firms have contributed the most to the MSCI China gauge’s recovery from a January low, while property and materials shares have risen more than 40%. There’s growing expectations for underperforming sectors such as equipment makers, exporters, technology and property to participate in the rebound.

“Small- and medium-cap stocks will benefit as the recovery spreads, given the improving macro credit risk profile along with an economic recovery,” said Chi Lo, a strategist at BNP Paribas Asset Management Asia Ltd. “Selective tech and property stocks could see good rebound as these sectors have been badly beaten down.”

Upside Opportunity

Previous advances of 30% in the Hang Seng China Enterprises Index within a five-month period were followed by a further gain in the gauge over the next four months with an average return of 25%, according to HSBC. That bodes well for investors looking to pick up shares even after equities have rallied. 

Among buy-rated stocks that offer more than 30% upside include Air China Ltd., Alibaba Group Holding Ltd., China Mengniu Dairy Co. and China Tourism Group Duty Free Corp., HSBC strategists including Herald van der Linde and Prerna Garg wrote in a note dated May 20. 

Some exporter stocks may also benefit from possible front-loading ahead of the US elections and positive policy support in their home market, said Raj Singh, a portfolio manager at Principal Asset Management based in Hong Kong.

To be clear, geopolitical tensions with US and key trading partner Europe remain a risk for Chinese equities. A clear upward trend for earnings, which largely underwhelmed in the first quarter, is also key to sustain the recovery.

Still, Wall Street brokerages are increasingly more bullish on China, with Goldman Sachs raising its 12-month target for some gauges due to falling risks, government support and historical evidence of additional returns after indexes enter a technical bull market.

The expansion of the equities rebound will “be an inflection point for Chinese growth and asset price recovery,” BNP’s Lo said.

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