Chinese stocks will probably rally as much as 20 percent as gauges of economic growth stabilize and valuations rise from historic lows, JPMorgan Chase & Co said.
“We recommend a trading buy of China equities, based on seasonality and all-time low valuations,” Michael Yu, a strategist at JPMorgan in Hong Kong, wrote in a report on Monday. “We expect a 15 to 20 percent market rebound in the coming weeks, once growth stabilizes due to seasonality and the market’s focus switches to structural reforms.”
The Hang Seng China Enterprises Index has dropped 9.1 percent this year, sending its valuation to a 32 percent discount versus the five-year average, as an official manufacturing index for January signaled a slowdown in the world’s second-largest economy. The purchasing managers’ index (PMI) tends to show higher readings in March and April, Yu wrote.
Improving economic data may spur investors to focus on policies that emerge from the National People’s Congress scheduled for next month, according to Yu. The ruling Communist Party unveiled its biggest package of economic reforms since the 1990s in November, including more private investment in state- controlled industries and a looser one-child policy.
The JPMorgan strategist recommended stocks related to healthcare, clean energy and environmental protection that may benefit from economic reforms. He said Chinese banks will get a boost from low valuations, large dividends and high return on equity.
The Shanghai Composite Index of mainland-traded shares rose 0.4 percent. Financial companies led today’s rally, with Ping An Insurance Group Co (中國平安保險集團) climbing 4.5 percent in Hong Kong. JPMorgan’s top picks include Ping An, Sino Biopharmaceutical Ltd (中國生物科技) and Tencent Holdings Ltd (騰訊).
The Hang Seng gauge is valued at 6.5 times estimated earnings for the next 12 months, versus the five-year average of 9.6, according to data compiled by Bloomberg.
China’s official PMI for last month dropped to a six-month low of 50.5 as output and orders slowed amid Chinese government efforts to rein in excessive credit. A separate PMI report compiled by HSBC Holdings PLC signaled the first contraction in six months.