China H-Share Strategists See 20% Gain on Cheap Valuations

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China H shares versus global equities

Chinese stocks in Hong Kong are poised to rally 20 percent by December after valuations fell close to the cheapest level in 12 years versus global equities.

That’s according to a Bloomberg survey of seven strategists, who have an average forecast of 14,114 for the Hang Seng China Enterprises Index of so-called H shares. The gauge, valued at 1.2 times net assets, is 45 percent cheaper than the MSCI All-Country World Index. The gap is near the widest since 2003, as the attached chart shows, and compares with an average discount of just 13 percent during the past 14 years.

Bulls from BNP Paribas SA to China International Capital Corp. say Hong Kong-listed shares have been unfairly punished amid a $4 trillion selloff on mainland exchanges. The Hang Seng China index fell into a bear market this month despite rallying less than half as much as the Shanghai Composite Index during the preceding boom.

“H shares offer better value,” said Manishi Raychaudhuri, an Asia Pacific equity strategist at BNP in Hong Kong. “Deep corrections like the present one provide opportunities to enter stocks that are fundamentally sound.”

BNP is one of the most bullish firms in the survey, with a target of 15,800 for the Hang Seng China gauge. CICC has the most optimistic forecast at 16,000, while Bank of America Corp.’s target of 12,000 is the lowest. The H-share gauge climbed 0.6 percent to 11,749.08 on Thursday, or about 21 percent below this year’s peak on May 26. It rose 0.9 percent at the close on Friday.

— With assistance by Cindy Wang, Lisa Pham, and Moxy Ying

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