China share markets have stabilized nicely after Monday's plunge, but it's not time to bargain hunt yet, analysts said.
"We see no rush to bottom fish the A-share market," HSBC said in a note Tuesday, adding the mainland market needs to see improved fundamentals before it can rally further as it faces a weak economy and earnings forecast cuts.
The Shanghai Composite closed up 1.9 percent Tuesday after dropping 7.7 percent Monday, its worst selloff since the global financial crisis in mid-2008, as brokerage and other financial shares took it on the chin after regulators announced measures to crack down on margin trading late on Friday. The index rose more than 50 percent last year. Hong Kong's Hang Seng China Enterprises Index closed 2.3 percent higher on Tuesday after shedding 5.0 percent Monday.
But while Hong Kong-listed brokerage and financial shares recovered, their A-share counterparts remained mired in losses. Citic Securities A-shares ended down 9.8 percent Tuesday after falling by the 10 percent daily limit Monday, while its H-shares rose 5.9 percent on Tuesday after falling 16.5 percent Monday.
"The policy intention couldn't be clearer from three major financial regulators that leveraged positions to speculate on the A share market should not have been encouraged," HSBC said. It expects A-shares will remain on the run, citing large pending sell orders on brokerages at Monday's market close.
In addition, the mainland has a pipeline of over 600 companies planning initial public offerings (IPOs), a move likely to increase supply "significantly," HSBC said.
Some expect the selloff on the mainland has further to run. "In the near term, the potential for further falls is high," Mark Williams, chief economist for Asia at Capital Economics, said in a note Monday.
With margin trading accounting for nearly a fifth of market volume on the Shanghai and Shenzhen exchanges, Monday's selloff is likely to put margin traders under pressure, especially as the decline in many A-shares was held in check by the 10 percent daily limit, he noted.
In addition, "although the trigger for [Monday's] reversal came out of the blue, there have been signs over the past month that some of the steam is coming out of the market," he said, citing slowing market volume and new account openings. Capital Economics expects the Shanghai Composite will end the year at around 3000, down from Tuesday's intraday level around 3135.
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Goldman Sachs also isn't expecting A-shares to fully recover just yet, for similar reasons, but it would consider becoming a buyer if shares correct further.
"Assuming this is a non-fundamental event and has no impact on aggregate market earnings, and headline index price-to-earnings ratio to revert to historical five-year averages (11 times), A-shares will have 10 percent more downside from current levels," Goldman said.
But just because analysts are turning their backs on A-shares doesn't mean they've gone bearish on China.
HSBC prefers Hong Kong-listed H-shares, citing cheaper valuations, with the Shanghai Composite's 2015 price-to-earnings ratio at a 78 percent premium to its Hong Kong counterpart. Despite the margin finance crackdown, HSBC upgraded H-share brokerage to overweight, noting among dual-listed financial stocks, the H-share brokerages, banks and insurance plays are at 18-38 percent discounts to their A-shares.
Goldman Sachs also shifted its preference to H-shares. In an early January note, Goldman said it still likes the China story on the pro-growth monetary policy, with more easing likely, benefits from reform measures and expected earnings growth. But those themes appear "better discounted" in A-shares, it said.
—By CNBC.Com's Leslie Shaffer; Follow her on Twitter