The recent market crash provides good investment opportunities in Chinese equities because they are less risky and China's economy is still growing at a respectable pace, according to Samsung Securities.
“The current equity market correction is likely to be reversed, providing a solid 5% to 10% upside,” Viktor Shvets, an equity strategist at the brokerage, said in a report. And “there is a high probability that Chinese equities will continue to outperform”.
The firm stated three reasons why Chinese stocks will outperform. One, the stocks are less risky than many others. Two, China continues to retain the ability to stimulate its economy, at least in 2011 and 2012. Three, China's equity valuations are far closer to distressed levels than most other markets. It said there is significant long-term value in both MSCI China and Shanghai's A-share market.
China Construction Bank, Tencent, China National Building Material, China Metal Recycling, Jiangxi Copper, Agile and CR Land are Samsung's preferred stocks.
However, Samsung does not see the markets at a point of capitulation that signifies the beginning of a major bear market rally.
Samsung released the report on Monday when stockmarkets worldwide showed a sea of red. In Hong Kong, where all the big-name Chinese companies are listed, the market dropped to a record low and confidence deteriorated further yesterday, with the Hang Seng Index dropping 5.6% and the Hang Seng H-shares Index, which tracks all the Hong Kong-listed mainland companies, tumbling more than 6%.
When readers of FinanceAsia were asked whether stocks would regain losses after the summer in a recent poll, the majority held a pessimistic outlook.
For years, Chinese equities have typically exhibited higher growth. Although, like other companies in emerging markets, they have much lower returns on capital than their Western peers, according to McKinsey, a US consulting firm.
McKinsey found that from 2006 to 2010, the average return-on-equity of Chinese companies was six percentage points below that of US companies — a gap that remained even when the profitability of US companies fell.
Chinese companies would need significant operating improvements to justify the current valuation level, McKinsey said in a report.