If the global economy is faced with another full-scale financial crisis in the next three months, Chinese stocks could plunge to their lows of 2008, says UBS's China Strategist. But if a recession is avoided, John Tang believes Chinese stocks might have already hit bottom.
“I think that to me, it's actually simple... (if) we have a full scale financial crisis in the next three months that we should see the market going down 25, 30 percent," Tang told CNBC on Tuesday.
Given that it's hard for investors to know which scenario we are in, Tang says investors should stay defensive for now.
Some analysts though believe Chinese stocks are a bargain with a forward price to earnings ratio of just 11.5 for the Shanghai Composite. But Tang warns that investors need to protect themselves in case the selling resumes.
“We need to focus on the liquid large caps, avoid the small caps,” he says.
Tang is most bullish on China's insurance sector, rather than the banks, which have faced increasing pressure from monetary tightening.
“If you even look across China, which sector has a lot of money which is ready to be invested," asks Tang. "I think insurance is; not even the banks. The banks are now suffocated by the regulators of the money.”
Continuing liquidity tightening in China along with rising salaries and further liberalization of the financial sector should see the insurance sector do well in the long term, according to Tang.
He advises investors to also bet on other liquid Chinese names in sectors such as consumer discretionary, cement and property, because he believes consumer demand will continue to be strong despite global uncertainty.