After suffering through an extended bout of bearishness, beaten-down China shares in unloved sectors are climbing and analysts expect the rally can continue.
"It's a dash for trash," Viktor Shvets, head of strategy research for Asia at Macquarie, told CNBC. "Stocks and sectors that were sold off and also that don't really have a long term future – that's the banks, the real estate, the SOEs [state-owned enterprises] – those are the areas that are running."
The recent rally has been fairly strong, with the Shanghai Composite up around 9 percent from its late-April lows, although it is still down more than 36 percent from its levels five years ago. The HSCEI, an index of Hong Kong-listed H-shares, is up around 20 percent from its late-April lows.
China's markets have been undermined by slowing economic growth as well as concerns over bad debts, shadow banking and property sectors. But economic data has been improving in recent months, pointing to stabilization in the world's second largest economy. Second quarter growth came in at 7.5 percent year on year, better than expectations and the broad consensus is that outlook for the second half is upbeat, helped by a series of"mini stimulus" measures from Beijing.
While the entire market may be valued at only eight to nine times earnings, but the stocks people want to buy, such as technology and consumer discretionary plays, are trading at much higher valuations, sometimes more than 25 times earnings, Shvets said.