Chinese stocks are primed for a rebound in the coming months, Gavekal Research said in a note, stating that they were undervalued after prolonged underperformance, and that Beijing was likely to unveil more stimulus measures.
In a note dated to Monday, Gavekal said they were “very bullish” on Chinese equities, and advocated staying long on the market. They recommended getting into Chinese stocks before the beginning of the next bull run.
The Gavekal note came just a day before China rolled out a barrage of stimulus measures, including a cut to bank reserve requirements, lower mortgage rates and potential liquidity support for local stocks. The moves saw China’s Shanghai Shenzhen CSI 300 and Shanghai Composite indexes rally over 2% each from near eight-month lows, while Hong Kong’s Hang Seng index surged over 3%.
Gavekal said the Chinese market was undervalued in comparison to gold, and that dividend yields on Chinese stocks were higher than the government bond yield. Such a scenario had occurred only twice in the past, and the Chinese market had rallied exponentially both times.
Gavekal said that persistent underperformance in the stock market was likely to elicit more stimulus measures from the government- with the government potentially cutting taxes for local firms.
Chinese stocks are by far the worst performers in Asia over the past two years, as a sustained deflationary trend in the country and a protracted property market decline saw investors largely pull out of local markets.
But this has pushed the view that several notable Chinese names, especially the country’s biggest internet firms, are trading at attractive discounts.
