Pullback in China stocks is excessive, UBS says, with reopening trades still offering buying opportunities

Tailwinds are building up for local equities, Swiss bank says
Market correction offers a good buying opportunity, bank’s Shanghai-based analyst says

China stock market

Zhang Shidongin Shanghai

Published: 6:30am, 30 Mar 2023

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The slide in China’s onshore stocks over the past two months may be overdone as investors have priced in the uncertainty of economic recovery by a greater extent than they should have, and the retracement offers a good opportunity for jumping back into reopening trades, UBS Group has said.

While the risk appetite for yuan-traded stocks trading in Shanghai and Shenzhen is below the multi-year average, tailwinds are building for local equities, including an improvement in leading economic indicators, a further rebound in transport activity and stronger mutual fund sales, the Swiss bank said in a note on Wednesday.

The CSI 300 Index has dropped 4.7 per cent from a high set on January 30, after China’s removal of strict Covid-19 restrictions spurred a rally at the end of October.

“In the near term, the market correction offers a good buying opportunity,” Meng Lei, a strategist at UBS in Shanghai, said in the note. “Together with a valuation re-rating, we think this would drive considerable market upside.”

Investors are too wary of the sustainability of China’s recovery from the damage caused by the pandemic, the Swiss bank says. Photo: AFP

The UBS comments might offer some respite to Chinese stocks, which have seen momentum wane amid doubts about the durability of China’s economic recovery after three years of its zero-Covid policy.

But the Swiss bank is not alone in calling a “buy” on Chinese stocks. MegaTrust Investment, a boutique asset-management firm, said earlier this month that a sell-off that wiped out US$450 billion in market value from Hong Kong stocks had already run its course, citing a pickup in economic fundamentals and easing of overseas turmoil in the banking industry.

The companies on the CSI 300 gauge are now valued at 12 times reported earnings, a 0.7 standard deviation below the average since 2017, while the risk premium – a gauge of investors’ risk aversion – is one standard deviation above the average level, according to UBS. The pattern implies that investors are too wary of the sustainability of China’s recovery from the damage caused by the pandemic, it said.

The latest economic data draws a mixed picture of China’s economy. Industrial production, retail sales and fixed-asset investment showed improvements in the January to February period, while exports continued to contract due to weak demand overseas.

A purchasing managers’ index of the country’s manufacturing industry due on Friday might, however, show that the sector expanded for a third consecutive month in March, according to an estimate by economists tracked by Bloomberg.

Local equities will also take solace from continuing policy support, as evidenced by Premier Li Qiang’s reiteration of Beijing’s unswerving support for the private sector, and a cut in banks’ required reserve ratios announced on March 17, UBS said.

The Swiss bank prefers consumer stocks, such as leisure, appliances and food and beverage firms, as a recovery in the services sector and activity by small and medium-sized companies will underpin household incomes, and the release of excess savings will support consumption as well. It recommends investors stay underweight on banks, energy and raw-material producers, textiles and agricultural companies.

“We tactically favour sectors that benefit from increased macro and industry policy support, and sectors with marginal fundamental improvements but historically low valuations,” Meng said.

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