JPMorgan Says Buy China Stocks as Government Backstops Rally

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The biggest weekly drop in Chinese stocks in seven years is a buying opportunity because the government will act to keep the bull market intact, said JPMorgan Chase & Co.

Authorities can reduce the pace of initial public offerings, clarify margin trading rules or encourage President Xi Jinping’s plan to build overseas transport links to boost investor sentiment, said Adrian Mowat, chief Asian and emerging-market equity strategist at JPMorgan. The Shanghai Composite Index slumped 13 percent this week, the most since June 2008.

“Policy makers will step in if the market correction gets beyond a comfortable level,” Mowat said in an interview in Hong Kong. “I would imagine if the correction continues next week you will hear something reassuring.”

Mowat’s bullishness contrasts with a growing crowd of China stock bears: more than half of investors polled by Morgan Stanley this month agreed the market is in a bubble. Fueled by monetary stimulus and record inflows from amateur investors, the index has climbed 121 percent over the past 12 months.

The Shanghai Composite entered a correction on Friday after falling more than 10 percent from its June 12 high. The gauge sank 6.4 percent at the close, declining on four of five days this week.

The plunge is attracting some foreign investors, with net buying of mainland stocks through the Hong Kong-Shanghai bourse link on Friday climbing to the most since the day the program started in November.

Companies linked to popular investment themes such as e-commerce, the new Silk Road of trade routes and pollution control are especially attractive, Mowat said.

Overweight Position

Given the influence of individual investors in the mainland market, “the way you make money is to trade with the themes rather than getting caught up looking at the PE multiples,” he said.

Shares on mainland exchanges trade at an average of about 256 times reported earnings. The median stock has a ratio of 98, while the Shanghai Composite, which has a heavy weighting toward low-priced bank shares, is valued at 23 times.

Mowat recommended an overweight position on the MSCI China Index in November and has been advising investors to add an off-benchmark position in yuan-denominated shares throughout 2015, he said.

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