Global markets have been rotating from technology into financials and the sentiment could trickle into China’s equity markets.
A stronger-than-expected growth environment and higher local bond yields in China are coaxing market participants into a sector that has been largely avoided for years, Credit Suisse noted in its investment outlook.
Speaking at a press briefing, Suresh Tantia, investment strategist for the Apac CIO said: 'Large cap banks [in China] have massively underperformed the market. All cyclical sectors have gone up except for the banks, so I think this will be the year of the banks.'
Credit Suisse views Chinese financials as deeply undervalued when compared to global peers, making them an attractive value play. It is expecting a 13-15% earnings growth for Chinese banks next year.
The Swiss bank is also expecting China to follow in India’s footsteps for a bank recapitalisation plan to address asset quality and capital inadequacy concerns.
So the price-to-book value ratio for the banks 'could revert to the historical average of 1.15x versus 0.81x currently, thus leading to possibly 40%-plus returns over the next 12 months,’ the outlook read.
Additionally, China’s decision in November to remove a broad range of foreign ownership limits on banks and securities firms could go some way in attracting investments into a closed market.
John Woods, Apac CIO, is recommending clients to go into H-shares over A-shares in 2018.
‘This year has been a strong story for the southbound momentum. We anticipate that largely continuing, mainly because the H-share market is dominated by the four large banks plus the industrials.
‘We think that's the most accessible and liquid avenue for investors to express a positive view on these sectors,' he explained.
Large versus small
Credit Suisse is bullish on the top four, large-cap names in Chinese financials – Industrial and Commercial Bank of China, Bank of China, China Construction Bank and Agricultural Bank of China – on the back of measures to curb shadow banking and the indiscriminate selling of wealth management products.
Nomura holds a similar view, stating that tighter regulation of the financial system and vulnerability to default risks are making smaller banks less attractive.
‘We are positive on the big banks and more cautious on the smaller banks,’ Rob Subbaraman, head of emerging market economics for global markets research at Nomura said at a briefing.
Chinese bank stocks suffered heavily in the market crash of June 2015 and have yet to recover their lost glory.
Some foreign institutional investors are ahead of their private banking counterparts in the investing game.
Singapore’s state investment company Temasek was the biggest foreign investor in Chinese banks this year, accounting for 25.9% of the stakes held by the 20 largest foreign institutional investors, S&P Global Market Intelligence said in a recent report.
The 20 largest foreign institutional holders of Chinese bank stocks, traded at home or in Hong Kong, held a combined 74.36 billion shares as of 7 November for a market value of $62.40 billion as of 16 November, S&P data showed.
Credit Suisse Private Banking, which is positive on Asia ex-Japan equities like its peers, believes the financials story extends to the rest of the region for 2018.
‘This year, we have seen a substantial rally in Asian tech stocks but financials have lagged the market by close to 10%,' Tantia said.
'But, I think now investors are going to see Asia financials differently – not as dividend-clipping, boring stocks but from a perspective of beautiful investments, which can deliver handsome returns next year.'