After bad news for Chinese stocks and yuan, a market turnaround is not far away for UBS as data improves
- China’s equity market ‘may have bottomed out,’ UBS strategist Wang says, citing historical signals
- Prices rebounded 8 per cent on average three months after large or excessive selling in the onshore stock market in the past: UBS
“We see several signs which historically would have suggested that the equity market may have bottomed out,” James Wang, head of China strategy based in Hong Kong, said in a report. “We see reasons for more optimism.”
UBS said economic fundamentals have improved, citing manufacturing and credit impulse. Measures to boost home sales, trim equity trading costs and cut personal income tax have exceeded investor expectations while increased talk between state officials have helped ease geopolitical tensions, he added.
The CSI 300 Index tracking the nation’s largest companies listed in Shanghai and Shenzhen has slipped 1.5 per cent this month and 4.1 per cent this year, approaching an 11-month low. Foreign funds sold US$2.1 billion of Chinese stocks last week, taking the six-week outflows to a record US$15 billion, according to Goldman Sachs.
Elsewhere, capital outflows from China’s financial markets amounted to a combined US$68 billion in July and August, abetting the yuan’s slump to a 16-year low against the US dollar.
Historically, Chinese stocks returned 8 per cent on average three months after such large equity outflows, Wang said. The yuan weakness, a surge on Chinese government bond yields, and dwindling turnover in the A-share market suggest the bad news could have been exhausted.
UBS is going up against rampant stock bears as well as the latest downgrade by strategists at BlackRock Investment Institute, after almost US$100 billion was erased this year from the MSCI China Index, the broadest gauge of stocks listed at home and abroad.
The index’s 12-month forward price-earnings multiple stands at 9.7 times, versus the absolute trough of 8.2 times marked by disorderly selling during the 2008 global financial crisis. In the absence of any forced selling, UBS argues the trough is closer to 9 times, meaning the current downside is likely to be small or limited.
The internet (e-commerce) and various consumer subsectors such as restaurants, leisure and beer are best bets to profit from the next market rebound, Wang said. The firm’s least preferred sectors are airlines, banks, materials and autos.
Bank of America is also in the bull camp. Strategists including Winnie Wu said investors they met in Beijing and Shanghai said “there is no need to be more bearish at the current levels”.
“Some investors believe the Chinese authorities are keen to defend a floor for the stock, bond [and] currency markets, and the most bullish investor we met expected a potential three to six month rally,” they wrote.
