Credit Suisse’s April 8th Asian Daily focused on China Market Strategy. CS analyst Vincent Chan argues that while the current situation in Hong Kong is quite similar to the 2007 “Through Train” (when regional stock indexes soared 35+%), there are some significant differences.
Chan lays out five areas of difference: “Comparing now with the 2007 ‘Through Train’ period, (1) valuation is much lower, with the exception that A-share SME stocks were already approaching the bubble valuation then; (2) the extent of rally for HK stocks is much smaller as compared to that period in 2007; (3) however, the A-share trading activity is much more active now than during 2007 (and anytime from 1996 onwards). HK stocks are still in a reasonable range; and (4) the government support is seemingly stronger. However, we advise investors that the government’s attitude could change very quickly, so do not rely too much on it. We believe that the HK stocks could still go higher in the near term, considering that the valuation is still at a ‘fair value’ range.”
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Markets at more realistic valuations today
For starters, today’s Hong Kong markets are nowhere near as overvalued as back in 2007. Keep in mind that from July to October of 2007, the Hang Seng Index and H-share were up 35% and 50%, respectively, before peaked, while the two indices are up only 6% and 10% from the end of February 2015 to date..
Government support this time
One argument supporting a continued bull market for A shares, and H shares to some extent, is that the government needs a strong stock market to facilitate its ongoing reforms, and it’s long-term plan that the stock market will supplant real estate as the major means of maintaining wealth for Chinese residents. Chan notes, however, that the government has offered only subtle support and encouragement so far. Moreover, the attitudes within the government could easily change as the circumstances evolve.
Chan notes :”We would be reluctant to overplay the ‘government support’ card—sticking to fundamentals is still a safer option, in our view.”
Credit Suisse top China picks
Finally, the CS report highlights that their current top stock picks in China are CMB, ICBC, Ping An, Cinda, Goldwind and Geely for H shares, and Midea and Moutai for A shares.