A series of monetary easing measures coupled with the launch of the Stock Connect in November last year has led to a sharp surge in mainland equities. The overheating in the market has led to several fund houses warn about a correction. Morgan Stanley Investment Management recently cautioned on a likely bubble in the onshore market.
Friday, for the first in seven years, the Shanghai Composite index topped the 5,000 mark.
“The forward P/E [price-to-earning multiples] for the two markets [as seen in charts below] are only slightly higher than their historical averages. While the price-to-book ratio of the H-share market (MSCI China index) still remains below its historical average,” Chan said.
“Chinese equities still look very reasonable when compared with Asian equity markets as a region. Its valuation-to-profitability ratio is still 24% below the region as a whole," she said.
In the near-term, further monetary easing measures and reforms in state owned enterprises will be key drivers for the market.
Chan agreed there are pockets of overvaluation in some stocks and sectors. But said, the fund house sees opportunities emerging, especially from reforms in state-owned enterprises and the valuation gap between A- and H-shares.
Playing on H-shares, SOEs
The firm sees more value in the H-shares market, which is trading at a discount of about 20-30% to A-shares.
SOE reform will be a key theme for Chinese equities this year, Chan said.
“Given that about 68% of the A-share market and 80% of the H-share market is made up of SOEs, reforms to enhance efficiency in these companies, will provide a further boost to the market.”
“Companies are expected to benefit as a result of improved efficiency and profitability.”
The fund house likes financial sector and sees selective opportunities in Chinese banks, which could benefit from the soft monetary policy of the central bank and also because of their cheap valuations.
The firm is also positive on property companies focusing on Tier-1 cities and likes industrial companies such as the railway equipment and engineering and construction companies.
“…[Railway equipment and engineering and construction companies] have stronger overseas franchise, larger overseas exposure and thus can benefit most from the "one belt one road" programme.”
A look at the one-year performance of HSBC GIF Chinese Equity fund against its benchmark index:
A look at the one-year performance of Chan against her peers: