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Stocktake: Bulls says China has ‘gone on sale’

Chinese stock market has lost a third of its value since peaking earlier this year

Although retail investors are pessimistic, more than 80 per cent of professional investors said Chinese stock prices would rise over the coming year. Photograph: iStock

Proinsias O'Mahony's face
Proinsias O'Mahony
Tue Oct 12 2021 - 00:00

China "has gone on sale", said JPMorgan analysts recently. So should investors be buying?

Aggressive regulatory actions in China have unnerved investors, with the Chinese stock market losing a third of its value since peaking earlier this year and Hong Kong’s Hang Seng Tech Index almost halving over the same period.

Institutional investors think the sell-off has gone too far, according to the latest quarterly Cheung Kong Investor Sentiment Survey. Although retail investors are pessimistic, more than 80 per cent of professional investors said Chinese stock prices would rise over the coming year. That’s a big increase since May, when less than half were optimistic.

Investors shouldn't be spooked by 2021's sell-off, Schwab analyst Jeffrey Kleintop argued in a Financial Times opinion piece last week. This year's 33 per cent drawdown is close to the 28 per cent average annual drawdown over the past 20 years, he said .

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Policy-driven bear markets are almost an annual event, Kleintop noted, occurring in 17 of the last 20 years. Nevertheless, the MSCI China Index has averaged annualised gains of 12.3 per cent over the same period, outperforming the S&P 500 (9.3 per cent).

Of course, this argument can be turned on its head. China appears determined to fundamentally reshape its economy; investors might wonder if the risks are fully priced in, given 2021’s bear market is no more severe than many previous years.

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