Julius Baer analyst sees opportunities in despised China market

HK-Shenzhen stock connect could be exciting: Julius Baer

Foreigners may be avoiding China's stock market in droves, but it has offered up interesting opportunities, said Mark Matthews, head of research for Asia at Julius Baer.

China's markets have stumbled since the start of the year, with the Shanghai composite down nearly 13 percent so far this year, even as U.S. stock indexes have been tapping record highs.

"It is the most despised market in the world. Foreigners have never been more underweight China than they are now," Matthews told CNBC's "Squawk Box" on Friday.

But there were many reasons to start targeting the market, he said.

"The core inflation is rising, the earnings revisions are rising, the foreign-exchange reserves have been stable for seven months in a row [and] is no longer falling," he noted, adding that the smaller regional banks had also begun recapitalizing.

That would address many of the concerns that have kept investors away from the market recently.

Matthews was also positive on China's announcement of plans to open its Shenzhen stock market to foreign investors, although the initial announcement received a tepid response.

Under the so-called Stock Connect, investors in Hong Kong will be able to buy stocks listed on China's Shenzhen stock exchange, while mainland investors would be able to buy an expanded array of Hong Kong-listed shares. The new Shenzhen ties would be similar to the existing Shanghai-Hong Kong Stock Connect, which was launched in late 2014.

"It's a very interesting market. I'm not surprised that there's been a very lukewarm flow into Shenzhen since the connect was announced," as it isn't up and running yet, he said.

But the Shenzhen market, which larger than Hong Kong's, offered different opportunities than Shanghai's market, Matthews said. The Shanghai connect has received lukewarm interest.

"I'm a big fan of Shenzhen and I think that people should be doing a lot more research on it," Matthews said. "It is the vibrant new economy in China and not just in tech, but a lot of the well-run private companies that are outside of tech are there, like Ping An Insurance, like China Merchants Bank."

But Matthews added that some of the fresh interest in China's market was merely due to its underperformance compared with other global markets.

"We're in a global bull market for equities with interest rates this low and bond yields this low. That also means that equities everywhere in the world that have lagged, people will be trying to find things they like in them," he said.

An investor uses a magnifying glass to read a notebook in front of an electronic board showing stock information at a brokerage house in Nantong, Jiangsu province, China, January 5, 2016.
China Daily | Reuters

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—By CNBC.Com's Leslie Shaffer; Follow her on Twitter @LeslieShaffer1