Analysts focus on brighter side of bottoming out; decry stock investor panic

Signs have brightened that China's A shares have bottomed out and their mid- and long-term prospects appear good, market insiders said.

Gao Ting, head of China market strategy at UBS Securities, said A-share investors have been ignoring good news such as better economic data and higher probability of more measures for deleveraging. Instead, there are unfounded fears of further tightening of market regulations and fast-growing concerns over pledging of stocks.

"We believe A-share investors are overly pessimistic," said Gao. "We believe the market sentiment could recover if policy marginally relaxes either in terms of infrastructure or fiscal spending. From a long-term perspective, structural reform should have a larger impact on Chinese equities."

Chinese stocks plunged to a two-year low on June 25 and June 26 because of escalating trade tensions between China and the United States, the weakening yuan and deleveraging efforts.

The State Council recently vowed to use monetary policy tools, including targeted required reserve rate cuts, to help small- and medium-sized enterprises get easier and cheaper credit access, Gao said.

In fact, the monetary authorities have already been fine-tuning policies, and structural reforms like income tax overhaul might be on the way, he said.

The Chinese central bank announced on June 24 that it will cut the rate of reserves to be kept by commercial banks with it by 50 basis points starting July 5. The measure will facilitate targeted lending to small and micro enterprises.

Fidelity International said the reserve ratio cut will boost liquidity by 500 billion yuan to 700 billion yuan.

Gao said over the past three months, defensive sectors such as consumer staples and pharmaceuticals have seen remarkable re-rating.

"We believe some cyclical sectors now have upside potential, such as leaders in material sectors with low valuation, and pharmaceutical stocks with rich gains could risk losing steam," he said.

"We are bullish on companies riding the wave of consumption and manufacturing upgrade, so leading players in the consumer staples and discretionary sectors remain our top picks."

Liang Hong, chief economist with China International Capital Corp Ltd, said valuations of blue chip stocks have taken a beating. In addition, the sharp drop in the market last week appears to reflect emotional panic.

"Attractive valuations will not support short-term rally largely. Historically, the timing of such features often provides opportunities for medium- and long-term investors to buy high-quality targets, similar to the situation in recent years like July 2015 and February 2016."

Liang said investors should pay close attention to future changes in policies in response to the current situation, as well as how China will continue to deepen reforms under the pressure of the current trade tensions with the US, to consolidate and extend the achievements already made and also to avoid external interference.

Liu Feng, chief economist at China Galaxy Securities Co Ltd, told China Securities Journal that in the long term, the stock market will be good, while in the short term, it will likely be a bit turbulent.

"The current valuation of the A-share market is at a relatively low level in a 10-year time frame, which is different from the stock market in the US whose valuation is close to an all-time high," Liu said.

The benchmark Shanghai Composite Index rose 2.17 percent to 2847.42 points on Friday; the Shenzhen Component Index surged 3.39 percent; and the ChiNext startup index soared 4.08 percent, suggesting Wednesday's declines could well represent the bottoming out of the markets.