(Bloomberg) -- China’s stock rebound may have room to run based on a number of underlying positives including technicals, fund flows, and the outlook for earnings.

The rally in the benchmark CSI 300 Index from its February low has seen it climb above several key resistance levels, while overseas investors start to return to the nation’s stocks, and analysts boost their forecasts for company profits.

Those encouraging developments add to a number of others including relatively low valuations and government initiatives to boost the struggling economy and equity market. A sustained rally in China shares may have broader implications too, helping improve the allure of emerging-market assets as a whole.

Here are four charts that show growing reasons to be optimistic about Chinese shares:

1. Positive Technical Signs

The technical outlook is distinctly promising. The 7% rally in the CSI 300 Index this year has seen it climb above the Covid-era low set in March 2020 and also break above a downward trendline connecting a series of highs since February 2021. The gauge closed Thursday at 3,664.56, up from its February low of 3,179.63.

“Sentiment has clearly improved, at least for the short term,” said Jai Balasubramaniam, chief market technician at Cashthechaos.com in London. “There is a technical breakout on Chinese stocks with a target of 4,100 on the CSI 300 Index.”

2. Favorable Flows

Overseas investors have also started to return to mainland Chinese stocks. Accumulated numbers starting in August initially showed a steady increase in outflows that topped out at 218 billion yuan ($30.2 billion) in January. The direction has since flipped, reducing total outflows over the period to about 100 billion yuan.

At the same time, flows into Hong Kong-listed stocks by mainland Chinese investors through the Stock Connect program have been positive on all but two sessions in the past 53 days. Total inflows this year have now climbed to HK$223 billion ($28.5 billion.)

The rally can be sustained for a while as valuations remain inexpensive and positioning from hedge funds and long-only funds remain near five-year lows despite the recent buying, said Sunil Koul, an Asia Pacific equity strategist at Goldman Sachs Group Inc., said in an interview on Bloomberg Television.

3. Improving Earnings Outlook

Profit estimates — arguably the most important metric for long-term investors — have also begun to recover.

Analysts boosted their earnings-per-share forecasts for CSI 300 Index constituents in April for the first in seven months, according to data compiled by Bloomberg. The six-month streak of declines through March was the longest since the Global Financial Crisis of 2008-09.

Still, any improvement in profits is far from guaranteed especially as first-quarter earnings results have largely fallen short of analysts’ expectations.

4. Signs Bottom Has Been Reached

The improvement in earnings forecasts in April, and so far in May, is a possible indicator that the three-year slide in Chinese equities may have reached a bottom. 

Previous lows for the CSI 300 Index in 2014, 2016, 2018 and 2020 were all followed by an aggregate increase in earnings estimates over the following three months, data compiled by Bloomberg show.

“Investor sentiment towards mainland China has turned on the back of supportive policy announcements and resilient earnings,” HSBC Holdings Plc strategists including Herald van der Linde and Prerna Garg wrote in a client note. “Cheap valuations, policy support and no major downside surprises on the earnings front should keep the risk/reward for the market compelling.”

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