Chinese stocks are cheap and the economy is poised to recover, making it a “dangerous” strategy on the part of some investors to bet on further declines in equities, said Herald Van Der Linde, head of Asia Pacific equity strategy at HSBC Holdings Plc. (HSBA)
“At this point in time, with low valuation and massive shorts in the market, it is not rational to bet that China will further fall from here,” he said in an interview from HSBC’s Singapore office yesterday. “It’s a dangerous strategy, not a rational one to do.”
Chinese equities have fallen for a third year on concern Europe’s debt crisis and property restrictions are curbing growth in the world’s second-biggest economy.
The Hang Seng China Enterprises Index (HSCEI) has plunged 19 percent from this year’s peak on Feb. 29, dragging down estimated price earnings to 7.7 times, compared with the five- year average of 14.8, according to data compiled by Bloomberg. The index gained 0.3 percent to 9,544.83 at 12 p.m. in Hong Kong. The Shanghai Composite Index has lost 11 percent since the year’s high set on March 2.
While Chinese stocks are cheap, investors may want to avoid equities in the short term amid concerns the economic slowdown may be deepening, Wilfred Sit, chief investment officer for Asia at Baring Asset Management, said in a Bloomberg television interview in Hong Kong today. China’s growth slowed in the second quarter to the weakest pace since the 2009 global financial crisis, putting pressure on Premier Wen Jiabao to boost stimulus to secure a second-half economic rebound.
“If there’s some macro shock, it could still come down 10 to 20 percent,” Sit said. “For anyone who can ignore the shorter-term volatility and focus on the longer-term investment, the market actually looks cheap at this point.”
HSBC’s Van Der Linde said on April 11 that Asian share gains would be curbed by slowing earnings. The MSCI Asia Pacific Index has slipped 5.1 percent since then after gaining 11 percent in the first three months of the year. The strategist said he favors Chinese telecom companies, rail shares as well as some cement and retail stocks, declining to name any. The government may reduce lenders’ reserve-ratio requirements four more times this year, Van Der Linde said.
The central bank has lowered lenders’ reserve-requirement ratios three times since November and cut interest rates on July 5 for the second time in a month to prevent the slowdown from deepening.
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