Investors have experienced volatile conditions in the market in the past few weeks as the US market underwent a correction. The Hong Kong market plunged by more than ten percent in one week. Since 1998, such drastic plunge in the stock market only happened during economic crisis periods. But if you are vested in the stock market, fret not. Deutsche Bank (DB) believes that the recent correction is an opportunity to buy, rather than sell.
Market Unlikely To Plunge Further
According to DB, historical data shows that there is a high probability of recovery after the volatile performance in the stock market. Out of the 20 occasions of weekly losses exceeding ten percent, there have only been three times of negative return for the subsequent three-month period. Moreover, the recent plunge did not have any macro alarming signal other than an escalated US inflation expectation and rising rates concerns.
Correction Is Making Market More Attractive
As a result of the correction, year-to-date gains for MSCI China were wiped out. MSCI China’s forward price-to-earnings also fell to 10.7 times. DB notes that MSCI China is now valued attractively, against its projection that earnings-per-share (EPS) would grow at a compound annual growth rate of 15 percent between 2018 to 2019.
Investors Takeaway: DB Bargain Hunting Strategy
To pick up on the bargain stocks in the China and Hong Kong market, DB recommends two strategies.
DB’s Strategy: Rebound Stocks
The first strategy is to screen for stocks that took a worse hit than the index. DB believes that these stocks that have taken a worse hit than the index will recover much stronger than the index, thus providing better profit-making potential for investors.
DB highlights the following eight stocks that have such decent upside potential:
DB’s Strategy: 4 GARP Investment Theme
DB’s second strategy is to screen for stocks under DB’s GARP investment theme. DB’s four GARP investment theme recommendations are:
- Greening (Environment)
The Chinese policymakers have selected anti-pollution as one of the top three battles to fight. According to DB, key potential beneficiaries include Biomass/Hazard Waste, Comprehensive Environmental Treatment, Natural Gas, Wind/Solar, and New Energy Vehicles.
- Advancing (Manufacturing)
Under the Made in China 2025 strategy, advanced manufacturing is gathering pace via technology innovation. Intelligent Manufacturing, 5G Telecommunication, Internet of Things (IOT), Cloud, Computing Semiconductor, AI, and ADAS should expect to see a great leap forward.
- Reforming (SOEs)
SOE reform was reiterated as a priority at the 2017 Central Economic Working Conference. To capitalise on this shift in China’s economic priority, DB highlights a few sector/companies that could see some upside in 2018.
- Premiumising (Consumption)
DB has highlighted consumption upgrade as a long-term theme due to the rising disposal income, demographic changes, and a stronger propensity to spend. DB notes that key potential beneficiaries include education, insurance, healthcare, entertainment, leisure, and trade-ups.
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