An increasing number of banks are betting on more upside from Chinese equities, including Lombard Odier which called A-shares «probably the only bright spot» for the remainder of 2022.
Since bottoming in April this year, the CSI 300 Index has rebounded by around 14 percent despite continued worries about a domestic slowdown driven in part by the country’s strict zero-Covid lockdowns. In contrast, the downtrend in global markets persists with more pressure ahead due to monetary tightening and the growing risk of a recession.
«As has been the case since late April, early May, China [A-shares could be] probably the only bright spot where you have a large economy rebounding from the lows with a policy stance which is supportive,» said Lombard Odier’s APAC chief investment officer Jean-Louis Nakamura in a recent webinar attended by finews.asia.
«There are not so many such windows of opportunities that exist in the market so far. So even if equity markets rebounded 15 percent to 20 percent already from the lows, we believe there is still room […] for a similar type of returns in the next three to four months.»
Insulation Drives Returns
According to Nakamura, there are two major reasons why the bank has been positive on A-shares since April this year.
Firstly, the market is mostly exposed to a domestic economy that has already bottomed out policy tightening in 2021 with easing now underway, compared to rising rates in developed economies. Secondly, there is also less correlation with global markets due to the lower levels of overseas capital, in contrast with the higher beta H-share market.
Still Cautious
Nonetheless, Lombard Odier continues to exercise caution, especially for big tech firms in China.
«Big tech platforms are still subject to uncertainties. Yes, the government and the authorities in China have claimed that the bulk of regulatory tightening was behind us so there’s no more bad news to expect. We want to see it first to completely believe it,» Nakamura said.
«Keep in mind that even if there is no more bad news on the regulatory front for web-based platforms, the level of the regulatory framework put in place for those companies in China is now far tighter than what we can see in the US and Europe. Which means the level of profitability and fair level of valuations of these companies cannot be compared.»
Within China A-shares, Lombard Odier is positive on companies and sectors that are expected to benefit from the domestic reopening and infrastructure push. They include consumer discretionary, materials, manufacturing equipment and technology, especially those related to climate transition or clean energy.
