Chinese stocks, which have seen significant selling pressure recently, are poised to rebound, according to Shaun Cochran, head of research at CLSA, a unit of China's largest securities firm. Cochran stated that the worst of the selling pressure has likely passed due to many global funds already holding underweight positions in Chinese shares. He made these remarks during an interview on Monday.
Foreign investors sold approximately $600 million worth of onshore stocks last week and dumped $12 billion worth of Chinese stocks in August, marking a record since the inception of Stock Connect in 2014. This was largely driven by weak external trade data and a weakening yuan. Despite this, Cochran believes China's cheap valuation and secular growth could provide better returns relative to other equity markets.
Cochran also indicated that it's time for Beijing to address "absolutely reasonable" concerns and real risks in the economy. He highlighted that China's core engines - exports, infrastructure, and property - are all reaching "a point of maturity" and the transition to new sources of growth "could be slow and lead to more volatility".
The MSCI China Index is currently trading at a price-earnings multiple of 10.5 times current earnings, the lowest since 2018, according to data compiled by Goldman Sachs (NYSE:GS). This compares with a five-year average of 13.4 times. In contrast, stocks in India, the current emerging-market favorite, trade at about 23.8 times.
CLSA states that Chinese stocks stand to benefit from a Federal Reserve policy pivot, based on historical trends. The Federal Reserve is expected to hold the target range for Fed Funds rate at 5.25% to 5.5% later this month, with the odds at 92%, according to CME Group (NASDAQ:CME). Goldman Sachs predicts no more hikes this year.
Historically, mainland stocks rose by 8.9% six months after Federal Reserve policy pauses, based on median returns over four such occasions in February 1995, May 2000, February 2006, and December 2018. Similarly, stocks in Hong Kong climbed 7.5% over the same period.
Cochran emphasized that China does not necessarily need to lead the next emerging-market cycle to participate in it. He also highlighted opportunities in financial services innovation and healthcare due to China's current account surplus economy and rapidly aging population.
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