Maintain cautious stance on China: HSBC
April 8, 2014, 5:45 am

Recent economic data has shown weakness in the Chinese economy [Xinhua]

Chinese shares have fallen to levels which are well below their five-year average, and are “too cheap to ignore”, HSBC said in its latest China investment atlas.

“No matter whether it is in terms of price-to-earnings or price-to-book terms, some Chinese stocks are valued even lower than during the global financial crisis,” said HSBC’s Head of China Equity Strategy Steven Sun in the report.

Although the timing of a stock market bottom is difficult to call, downside risks have been alleviated by the depressed valuation, Sun said.

“We maintain our cautious stance on 2014 stock market performance, given the structural challenges that China needs to overcome,” Sun said.

“We think a rally might be underway due to the cheap valuations, but this is more likely to be a short-term rebound than a new cyclical bull market,” he added.

However, China continues to outperform Asian markets. In terms of price-to-earnings multiples, the discount that Chinese equities trade at is the widest it has been since 2007, he said.

The HSBC manufacturing purchasing managers’ index (PMI), dipped to an eight-month low of 48 in March, from a final reading of 48.5 in February. It also signaled the sharpest fall of output since November 2011.

Sun said most of HSBC’s 2014 index target forecasts are unchanged, with Morgan Stanley Capital International (MSCI) China at 68 and Hang Seng Index at 24,000.

But HSBC slightly lowered Shanghai Composite Index to 2,400 from 2,500 and the Hushen 300 Index of the leading Shanghai and Shenzhen A-share listings to 2,600 from 2,800.

Chinese authorities are trying desperately to balance controlling pollution and credit bubbles with maintaining steady economic growth. Recent economic data has shown weakness in the Chinese economy.

On Tuesday, the benchmark Shanghai Composite Index opened lower at 2,054.53 points, down 0.21 per cent. The Hushen 300 Index opened at 2,179.92 points, down 0.25 per cent.

Source: Agencies