Chinese equities have big potential to push higher having reached their lowest point since 2009, and should beat global equities as a whole over the coming months as economic fundamentals improve, predicts Bank Sarasin.

The latest in a line of firms to opine about China in the wake of the country’s once-a-decade change to its ruling Communist Party leadership structure, Bank Sarasin said the country’s stock market should outperform the MSCI World Index of developed countries’ shares.

“If earnings and valuations increase at the same time in the first half of 2013, as Sarasin expects, Chinese equities will have significant upside potential,” the bank said in a note.

The MSCI China A 50 index of stocks shows returns at a negative -1.4 per cent since the start of 2012, compared with an 13.5 per cent rise in the MSCI World Index of developed countries' stocks over the same period. As reported by Reuters, the Shanghai exchange, has been under pressure. It fell through the symbolically important support level of 2,000 points on 27 November.

Data ignored

Sarasin said that some important positive developments have been ignored or little noted by investors.

“While the media focused on the leadership transition, the increase in the HSBC Manufacturing Purchasing Managers’ Index to above 50, indicating expansion, went almost unnoticed. This confirms the upward trend observed in recent months. Improved macro-data since September show that the economy has achieved a soft landing,” Bank Sarasin continued.

“Given the political conservatism of the new leadership, a major economic stimulus is not expected. But with railway freight data and export figures indicating a recovery, growth will accelerate even in the absence of additional fiscal or monetary stimulus,” the bank said.

Philipp Baertschi, chairman of the firm’s investment committee, said: “China is comparatively inexpensive both on a historic basis and compared to other emerging markets. Political uncertainty and weaker growth this year, as well as reduced earning estimates, explain the current risk premium. But we expect these to become positive factors in 2013, with political uncertainty removed, increasing growth and improved earnings estimates.”

The bank said Chinese equities currently trade at a price-to-earnings ratio of well below 10 times earnings, which is 20 below historical valuations.

“In addition to equities, rising domestic demand should lead to higher prices for metals, enhancing the prospects for commodity equities. Western consumer goods companies which export a larger portion of their goods to China will also benefit. The luxury goods industry, in particular, is likely to be a winner,” the firm continued.