SocGen: China’s stock correction has gone too far

China yuan coins

China’s stock market correction has gone too far, with the onshore equities down more than 20 percent from their late January peaks, Societe Generale said in a note on Monday, advising building exposure to the mainland’s consumer plays.

“We think a lot of bad news is in the price,” it said in a note on Monday.

Fears of the U.S. trade war escalating have been a driver of the selloff in China equities. But Societe Generale noted that onshore Chinese stocks have little exposure to exports.

“We observe this lower dependency at both the macro – the contribution of exports to gross domestic product growth is dwindling, with a
rebalancing toward consumption – and micro levels. On the latter, we estimate that more than 90 percent of CSI 300 components by weighting generate their sales domestically,” it said.

SocGen reiterated its call to Overweight China consumption plays.

“Real income growth is steady, the middle class is expanding and wealth effects remain positive (essentially housing). However, the recent equity market correction saw all sectors bar Health Care decline by 10 percent or more,” it said.

“We propose gaining exposure to consumption growth through two channels: indirectly through China tourist stocks in Asia and directly through a basket of China onshore consumption stocks,” it said.

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