Chinese stocks in bear market upgraded by Credit Suisse strategists on policy easing, valuation appeal

  • Chinese stocks fell into bear territory this week from a peak in February on a combination of factors including tech crackdown and economic headwinds
  • Credit Suisse reverses downgrade calls in November 2020 and February 2021 that helped investors sidestep sell-off

Chinese stocks, which slumped into bear territory this week, have been upgraded by strategists at Credit Suisse who cited policy loosening, cheap valuations and stronger economic recovery momentum as their reasons.

The Swiss investment bank raised its recommendation to overweight from market weight relative to global benchmarks, and to market weight from underweight in its Asia-Pacific strategy, according to reports published this week.

The decision reversed its downgrade calls in November 2020 and February last year, helping clients avoid steep losses in the world’s second-largest capital market. A combination of tech sector crackdown and economic slowdown triggered a trillion-dollar sell-off and sent the CSI 300 Index tumbling by more than 20 per cent from the peak in February.

“We see reasons for Chinese equities to potentially outperform, even if only on a tactical (three months) basis,” the bank’s London-based strategists wrote. Monetary policy is being eased and economic momentum is turning up while earnings revisions (relative to global markets) are troughing, they said. “Valuations look cheap.”

The upgrade reflects its bullish 12-month view of the MSCI China Index, the broadest measure of onshore and offshore stocks. The gauge, with 739 members and US$2.5 trillion in capitalisation, has dropped 4.6 per cent this year following a 22 per cent setback in 2021, according to Bloomberg data.

The diverging policy path between China and other major global central banks have convinced rival banks and money managers to turn bullish on Chinese equities. Deutsche Bank and Jefferies raised China to overweight this month in the face of a global sell-off stoked by the Federal Reserve’s hawkish signals.

China’s economic growth slowed to 4 per cent last quarter from 4.9 per cent in the preceding three months. Policymakers have injected more cash into the system and lowered key interest rates over the past two months, keeping its pledge to stabilise growth in 2022.

Economic momentum is picking up with the official manufacturing purchasing managers’ index rising for a second month in December, Credit Suisse said. Chinese stocks are also trading at a 28 per cent discount to global peers based on price-earnings multiples, it said.

“Although there will be micro-measures rather than a big bazooka, our confidence that growth will fall no further enhances the appeal of the discounted valuations,” the Asia strategists Dan Fineman and Kin Nang Chik said. Their top picks are biased towards consumer, health care and tech sectors.

While China gained at the expense of Japan and the Philippines, Credit Suisse listed several reasons for not going overweight in its Asia-Pacific strategy. Other regional markets are better positioned cyclically and earnings revision continue to lag peers by a wide margin, while the yuan may be prone to weaknesses, they added.

Author: Cheryl Heng, SCMP

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