China’s yuan-denominated stocks may outperform global markets in the next three months as valuations are “very cheap,” liquidity improves and the threat of further policy tightening recedes, according to Nomura Holdings Inc.

The benchmark Shanghai Composite Index rose 10 percent in July, the biggest monthly gain in a year, on speculation the government will increase investment and domestic spending to bolster the economy as growth slows. Manufacturing contracted in July, an index of purchasing executives released Monday showed, as the government clamped down on property speculation and investment in energy-intensive and polluting factories.
“The economy is rebalancing,” Sean Darby, chief Asian equity strategist at Nomura, ranked first in China research by Institutional Investor magazine, said in a Bloomberg Television interview Monday. “The urgency for more tightening measures to cool part of the economy down will recede, so for asset markets just generally, this is the period for them to perform.”
Nomura joins brokerages including Macquarie Group Ltd. and JPMorgan Chase & Co. in growing more positive on China stocks, citing the prospect of loosening property and lending curbs and attractive valuations. China International Capital Corp.’s global equity strategist Hao Hong said Monday a gauge of investment sentiment compiled by the brokerage turned bullish last month, signaling long-term buying opportunities.
China has increased banks’ reserve requirements three times this year and set a lending target of 7.5 trillion yuan for lenders in order to curb asset bubbles in the nation’s economy.
This year’s 19 percent tumble for the Shanghai Composite has driven down reported earnings to 19.6 times, compared with 49.5 times at the market’s peak in October 2007, according to weekly data compiled by Bloomberg.
Profit at China’s publicly traded companies rose 50 percent in the first half, the Shanghai Securities News reported today, citing 264 companies that have released results as of July 31.
“The A share market comes out very, very cheap,” said Nomura’s Darby, who turned bullish on China stocks in June. “For the next quarter or so, this may turn out to be one of the better performers globally.” (Source:Bloomberg)