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A-shares correction an entry point, says Deutsche AWM

A short-term correction in the Chinese equity market is an entry point because onshore shares still look attractive compared to global equities, said Sean Taylor, regional investment head for Asia-Pacific and head of emerging markets.

The MSCI China still trades at attractive valuations relative to the MSCI World, Taylor said, while detailing the firm’s market outlook for the second half of the year.

In the medium-term, the mainland markets should benefit from monetary easing measures and the government’s efforts to change from an investment-driven to consumption-driven economy, he added.

He is not concerned with the recent correction in A-shares and said the market will continue to be driven by government policies.

Reacting to the market correction, on Sunday the People’s Bank of China cut both interest rates and the cash reserve requirement ratio for banks, the fourth time since it started a monetary easing cycle last year.

Taylor said he did not expect simultaneous cuts in the RRR and interest rates and doesn’t believe the mainland markets will have a huge collapse because they are policy-driven and not earnings-driven.

“The government doesn’t want the market to go up too much, but it doesn’t want it to collapse. It will continue to be a decent market.”

The launch of the Hong Kong-Shenzhen Connect, likely later this year, will be a big market catalyst, he believes.

Deutsche sees opportunities in the financial sector, but excludes banks. Taylor has worries over banking sector margins due to “asymmetric rate cuts in lending and deposit rates” and thinks non-performing loans could rise in a weak economy.

Consumption-oriented themes like entertainment, internet, cosmetics and tourism are also attractive.

The firm also finds areas of investments emerging from the government’s One Belt, One Road initiative.

Deutsche predicts 6.8% GDP growth for China this year.

Southeast Asia slowing

North Asia is more attractive than Southeast Asia, which has no low-hanging fruit anymore, Taylor said. Structural issues include a slowing growth rate in Indonesia and weakening earnings growth in Thailand.

In Singapore, there is no catalyst to propel markets and the weaker Singapore dollar versus the US dollar will cause equities to underperform, Taylor said. Another key reason for the uninspiring outlook for Singapore is the on-going weak property market.

“Valuations are not expensive in Singapore but we felt there is no catalyst for the market to outperform.”

Despite the bleak regional view, the Philippines is one exception even though it is expensive, Taylor said.

“It is very much consumption-driven and uncorrelated to global events, with about 6.5-7% economic growth going forward,” Taylor said.

Neutral on India

The firm has cut down its overweight view on Indian equities because reforms, which aim to make doing business easier and production more efficient, will take time to materialise.

“In the last six months, we have come to tactical neutral. Valuations are now attractive but we still need a catalyst.”

Having said that, India still offers the best medium growth story for Asia. If GDP picks up this year or next, India will have 12-14% annualised earnings growth for the next three years, Taylor said.


Part of the Mark Allen Group.