Buying opportunity in China shares, Deutsche Bank says

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While an impact from the U.S. market pullback and some profit-taking were expected, the H-share market selloff appears overdone, Deutsche Bank said in a note on Monday, pointing to a healthy macro backdrop and earnings outlooks.

How the index has performed after turbulent weeks historically suggests a high probability of recovery, the bank said. It pointed to 20 occasions since 1998 when the Hang Seng China Enterprises Index, or HSCEI, has dropped more than 10 percent within five trading days, and 17 for the MSCI China Index, or MXCN. But it added that most of those were during economic crisis periods.

”Last week’s collapse happened without any alarming signals other than escalated U.S. inflation expectations and rising rates concerns,” the bank said. It noted that in the previous week, the Hang Seng Index (HSI), HSCEI and MSCI China dropped 9.5 percent, 12.1 percent and 10 percent respectively, their sharpest one-week drops since 2008, during the Global Financial Crisis.

Historically, whenever the HSCEI has drops of this magnitude, the average one-week, one-month and three-month returns are 4.9 percent, 9.6 percent and 23.5 percent respectively, the bank said.

It added that the selloff wiped off year-to-date index gains and left the MSCI China ex-ADRs trading at a 12-month forward price-to-earnings ratio of 10.7, which it called “very attractive” when compared with its expectations for 15 percent compound annual growth rate (CAGR) for 2018-19 earnings per share.

Deutsche Bank noted that the HSCEI’s price-to-earnings ratio was also back to 7.6, leaving it at a wide discount to developed market and some emerging market peers.

The bank selected eight stocks it has rated at Buy and which fell more than 20 percent for a “what to buy” list. The stocks are Future Land, Citic Securities, KWG, Huatai Securities, Country Garden, CNBM, Zhengtong and Chalco.

Deutsche Bank previously set its end-2018 MSCI China target at 110 and its HSCEI target at 14,000.

The HSCEI ended at 11,900.31 on Monday, down just 1.36 points.