Corrections present opportunities
Revisiting our thesis: Bull-market corrections are common
We note bull markets globally in the past 40yrs have had a 44% probability
of seeing a 20%+ correction, driven by PE retracement, with a key tP/E
support at 15x. We think China is undergoing a correction, not heading into
a systemic/bear phase, but the s-t path could vary among A, H, and ADRs.
A shares: 2/3 into deleveraging cycle; Value in large caps
Forced unwinding of high-risk leverage may be close to the end, but the
shrinking margin balance remains high in absolute (Rmb1.4tn) and market
cap (7.1%) terms. We see deleveraging as critical to prolonging the uptrend
and believe we are 2/3rds through the process, and we believe the govt has
the will/power to fend off systemic risk if necessary. Value is emerging in
select large caps as index fPE has dropped to 14.4X, and more proactive
buybacks have surfaced. That said, investor confidence may take time to
repair, thereby compressing n-t Sharpe ratio, and market structure
concerns may delay inclusion to MSCI. 12m CSI300: 5,000 (+22%).
H shares/ADRs: Intact investment case; buy on corrections
Improving sequential growth in 2H, attractive valuations (9.9X fP/E), visible
policy/reform/index inclusion catalysts, and light investor positioning
continue to buttress our positive stance. The liquidity backdrop for H/ADRs
could be choppy near-term as Mainland flows unwind, but the selloff has
offered investors attractive opportunities to buy. 12m MXCN: 90 (+30%).