There are increasing opportunities in China A-shares, which should re-rate if it sees more fund flows from bonds and the property market into the equity market.

That’s the view of Caroline Yu Maurer, head of Greater China equities at BNP Paribas Investment Partners.

Maurer said: ‘If MSCI passes a favorable decision -- the probability for a June 2017 favorable decision has increased -- it may also help the A share market sentiment significantly.

‘The China market still offers a wealth of well-managed, stable companies which are relatively insulated from external risks.

‘Hong Kong-listed stocks will be further supported by southbound Stock Connect flows as investors diversify assets offshore on expected RMB weakness. 

‘Southbound flows have already accounted for 12-13% of the turnover on the Hong Kong exchange in 2016.’

Recovery trend

Maurer said corporate earnings have troughed since the second quarter of 2016, and she expects the recovery trend to continue into the first half of 2017. 

‘Apart from investing in companies that will continue to grow earnings sheltered from external risks, we also see investment opportunities related to the commodities sector and state-owned enterprise reform theme.  

‘The new politburo standing committee selected by President Xi Jinping next year is expected to have a more consensus view and clear direction in the areas of domestic policy, as well as economic and SOE reform policies.

Valuation

‘Valuation is attractive,’ she said.  ‘The MSCI China index is trading at 11.5x P/E multiple, well below its 10-year historical average of 13.4x.  The MSCI China index excluding US-listed American depositary receipts is trading at a 10% and 30% discount to its 10-year historic average forward P/E and P/B, respectively.  

‘While global funds remain significantly underweight China, this limits the downside risk, in our view.’

Fiscal policy

According to Maurer, fiscal expansionary policies in China and the US may drive a new commodities cycle and trigger a reflation cycle globally.

‘The key risk in this scenario is that inflation may accelerate, and central banks will be forced to tighten monetary policy,' she said.

‘But this is not our base case, and if it does unfold, it will unlikely unfold until the latter part of 2017 at the earliest.'