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China Correction a Sign Stocks in Bull Market Territory

While Chinese shares have skidded on the back of further tightening fears by the country's central bank, one analyst believes this is a convincing sign the Shanghai Composite is in bull market territory.

"In the long term, the pullback in a bull market actually confirms ...or reinforces the bull market," John Tang, China strategist at UBS Investment Bank said on CNBC Monday. "If there is no pullback, the bull market will die much quicker..and the height is not going to be that high," Tang said.

With the current correction, Tang said he is more convinced the market will see a "longer" and "higher" bull run.

The Shanghai Composite recovered on Monday after posting its biggest percentage loss in 14 months last Friday amid talk of further central bank tightening.

Tang agreed that more rate hikes are in store for China, however he noted that this should be treated as a sign of a healthy economy.

"If you have an economy as healthy as China, (where the) regulator can do tightening without overkilling the economy - that's already a sign of confidence," he said.

H-Shares Preferred

When it comes to investing in Chinese equities, Tang said he prefers those listed in Hong Kong (H shares) to the ones traded on the domestic market. "If the overseas and excess liquidity cannot get into China with all those defensive taxes from Chinese authorities, they will have to stay in Hong Kong to play the Chinese market," he said.

China's move to pump out the huge liquidity within the local market will also be "super beneficial" to Hong Kong stocks, Tang added. "I'm very bullish about Hong Kong, about offshore listed Chinese companies here," he continued, saying that he expects H sharesto outperform domestically-listed A sharesagain.

Within the small-to-mid cap sector, Tang said he likes equipment and machinery stocks that fit into the multi-facets of China's five - to - 12 year plan.

He is also focusing on power equipment and nuclear power stocks as he expects to see "mature technology and unquestionable growth".

Lastly, Tang said the new materials sector was worth looking into as he sees the sector being localized.

When manufacturing gets transferred to China, machinery gets localized, and so will new materials, he said.

"When China develops one new material...it will take over the world again. You can look for the next Dupont in China."

Tang recently downgraded consumer staple stocks as it has underperformed at the midstage of the bull market, however he said he is still bullish about consumer discretionary stocks, like autos, home appliances and retail. "Those sectors are still great," he said.

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