Correction in China’s stock market is good news for fans of cyclical stocks, BCA Research says

The Shanghai and Shenzhen markets have lost a combined US$1.35 trillion in value from its peak of US$11.5 trillion

China’s market correction should be seen as a welcome adjustment as it helped shave valuation excesses and create a base for another rally, says BCA Research

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People walk over a bridge displaying stock prices in Shanghai’s financial district. Photo: EPA-EFE

Published: 9:01am, 11 Mar 2021Updated: 9:20am, 11 Mar 2021

China’s stock market correction may have further room to go and should be seen as a welcome adjustment as it helped shave valuation excesses and create a base to mount another rally, according to a BCA Research strategy report.

The report came after the CSI 300 Index retreated almost 14 per cent from its record-high on February 10 amid a surge in US government bond yields. The broader Shanghai and Shenzhen markets have now lost a combined US$1.35 trillion in value from its peak of US$11.5 trillion, according to Bloomberg data. The CSI 300 price-earnings multiple reached 22 times last month, matching the peak before the 2015 market crash.

“The good news is that recent gyrations in the US equity market, coupled with concerns about further tightening in China’s domestic economic policy, have triggered shakeouts in China’s equity markets,” strategist Jing Sima said in a March 10 report. “The pullback in stock prices has helped to shed some excesses in frothy valuations and has opened a door for more upsides in Chinese stock on a cyclical basis.”

China’s political elites at the “two sessions” gathering have not commented on the market since the slump quickened last week. Chief banking regulator Guo Shuqing cautioned about asset-bubble risks in offshore markets on March 2, signalling authorities are alert to market excesses.

The CSI 300 Index climbed 0.7 per cent on Wednesday in a muted response to a 3.7 per cent rally in US technology stocks, with market pessimism near the depth of Covid-19 pandemic about a year ago. In Hong Kong, shares of Chinese tech juggernauts have slipped into a bear-market territory.

BCA Research prefers owning domestic A shares, where the index is heavily weighted in value stocks, to those in the MSCI China Index containing expensive new-economy stocks.