Chinese stocks are still attractive despite the recent overseas sell-off, analysts say

(Yicai) Aug. 14 — There are still opportunities in mainland China’s stock market, thanks to low valuations and good profit growth, and it is the least sensitive of all major stock indexes to the U.S. economy, analysts said.

The MSCI China index, which tracks shares of mid- and large-cap Chinese companies listed on the mainland, Hong Kong and overseas, was relatively immune to last week’s panic selling in the US, analysts said. Because of their weights, the MSCI Poland, Thailand and Mexico indices are more sensitive to the US economy.

The three main US markets experienced their most turbulent week since the beginning of the year last week. This also dragged down stock markets in the Asia-Pacific region, but mainland China’s stock markets were not as affected.

Short-term fluctuations are expected, especially as the risk of overseas recessions looms large, Sunil Tirumalai, global emerging markets equity strategist at Swiss banking giant UBS, told Yicai.

The Chinese stock market also presents opportunities, said Huang Senwei, senior market strategist at US asset management firm AllianceBernstein Fund Management. Currently, the valuations of listed companies on the continent are relatively low, and the forecasts regarding the increase in the profitability of the companies will reach 13.6% this year.

Japanese-listed companies, whose yields are not that different from those listed on the mainland, are expected to have slower profit growth at around 9.4%. However, the Japanese stock’s price-to-earnings ratio is much higher than China’s, at 15 compared to 12.

As a result, from a value investment perspective, there are investment opportunities in the mainland market, although market sentiment is still an obstacle.

Northbound funds, which refer to Hong Kong investors trading in mainland stocks, have turned into net outflows this year. On Friday, net sales of mainland stocks were CNY 7.8 billion (US$1.1 billion), and net outflows reached CNY 2.5 billion yesterday. So far this month, aggregate net outflows have reached CNY 27 billion (US$3.8 billion).

Global hedge fund allocations to Japanese stocks have remained high for years, indicating the potential risk of near-term overcrowding. While their allocations to Chinese stocks have been low in recent years, indicating that the risk of overcrowding is not high. But for an improvement in fund inflows, there must be more signs of economic recovery.

In the medium term, the market will still boast opportunities, said An Yun, deputy managing director at Schroders Fund Management’s China arm. There are a number of sectors that should see a turnaround soon, such as semiconductors, new energy, automation, engineering, cement and non-banking finance. And other opportunities could arise.

The new round of investment in information technology, which is driven by innovation in artificial intelligence, is worth a long watch. And in particular, Chinese companies such as new energy firms, energy sources and e-commerce logistics companies that are going global remain of interest to investors.

Publisher: Kim Taylor