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China stock valuation ‘attractive’, don’t expect quick recovery


According to Kelvin Tay of UBS Global Wealth Management, Chinese stocks look “very, very attractive” right now but are unlikely to turn around quickly in the next few months.

“I think China is cheap. If you look at China’s performance this year, on a relative basis, it’s actually underperforming about 40 percent of both the European index as well as the US index. “, Tay, regional investment director. at UBS Global Wealth Management, told CNBC’s “Squawk Box Asia” on Tuesday.

At the end of Tuesday’s trading session, China’s CSI 300 index, which tracks the largest listed stocks in the mainland, was down nearly 5% on the year. In Hong Kong, where many of China’s tech giants are listed, Hang Seng Index fell more than 14% in the same period.

While comparing, S&P 500 on Wall Street rose to a new record close – 69th in 2021 – most recently on Monday. In Europe, all of Europe Stoxx 600 was up more than 22% for 2021 as of late Tuesday.

“From a valuation perspective, from a positioning perspective, China certainly looks very, very attractive,” Tay said.

The real estate sector has weight in the market

However, he warned that the Chinese market is unlikely to recover in the next three months due to the “distinct lack of catalysts” right now. He cited China’s demand for the property space to stabilize before the market could turn around.

Investors have largely shunned China’s property sector this year amid fears of defaults as developers face a credit crunch. In December, the real estate developer was heavily in debt China Evergrande Group fall into default after failing to confirm payment of a debt obligation.

“We think things are really starting to turn around but you know, on the issuer side, on the China high-margin front, maybe you’ll still get some news, some some negative news about some Tay said.

Such negative developments have the potential to hurt sentiment, he warned: “If sentiment is fragile in the Chinese market right now, any small negative news is likely to be amplified. and get big, and that’s going to really affect the market. full.”

Read more about China from CNBC Pro

Looking ahead, Tay said Hong Kong-listed Chinese companies – which have “been beaten really, really badly” this year – are likely to be “much more attractive” than their peers. in the mainland.

“The tightening of policy risks, we think most of that is really over and done,” the investment director explained. “What you’re going to do in the future is probably tweaking measures, not, you know, a system overhaul similar to what we had in the tuition industry in July this year. “

Expectations of the yuan weakening

Another factor that is set to give Hong Kong-listed Chinese stocks a relative boost is expectations of a weakening yuan next year.

Tay said: “The renminbi has risen very strongly. “The government has indeed emphasized on a few occasions that it is not entirely comfortable with the better performance of the renminbi relative to other currencies over the past six months.”

As of Wednesday afternoon during Asian trading hours, yuan on land has gained more than 2% against the dollar for 2021, while its foreign counterpart has gained almost 2% against the greenback.

“We expect the renminbi to actually weaken in 2022,” Tay said, adding that that will likely affect the performance of mainland-listed Chinese stocks due to correlation “very close” with the renminbi.

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