Jumping on the China bandwagon? Analyst reveals whether A-shares or H-shares are a better bet

Published Thu, Mar 2 20237:32 PM EST

China's reopening from the pandemic has been a big theme in 2023. It's widely seen as a major boost for stock markets around the world, and analysts have been quick to jump on that bandwagon. But the euphoria around the reopening has since tapered off, with several key benchmarks in Hong Kong and mainland China paring some of their gains since the beginning of the year. The pullback could be a good opportunity for investors to buy Chinese stocks at more palatable prices, according to Bernstein analyst Rupal Agarwal. "In our last China note, we had argued that the market is likely to see a pullback in the short term, however we find ample opportunities for both short-term and long-term investors," Agarwal wrote in a note on Feb. 28. She noted that the rebound in mainland stocks, or A-shares, has been "milder" at 19%, while H-shares, which are shares of Chinese companies listed on the Hong Kong Stock Exchange, have rallied 36% in the same period. A-shares are shares of publicly listed Chinese companies that trade on Chinese stock exchanges. These shares are denominated in Chinese yuan. The trading of H-shares is done on the Hong Kong Stock Exchange in Hong Kong dollars. "We agree that mainland markets are looking better positioned- we recommend looking at past 12 months laggards, undervalued and high beta stocks within A-shares," Agarwal said. She added that A-shares are now trading at "cheaper-than-usual" valuations relative to H-shares, which should offer "better return prospects" for A-shares over the next 12 months, citing previous instances in 2016, 2018 and 2020. Earnings support for A-shares has also improved — they've had stronger momentum than MSCI China since their November 2022 bottom, with several sectors now seeing positive earnings revisions, according to Agarwal. Stock picks When it comes to A-shares, Bernstein's top picks include alcoholic beverage makers Wuliangye Yibin and Kweichow Moutai , as well as Ping An Insurance and the Industrial and Commercial Bank of China . The stocks are rated overweight by the investment bank. While A-shares may be the more attractive way to play the China story, lack of accessibility is a key hurdle for foreign investors. Given China's strict capital controls, A-shares are generally available for trading only to mainland Chinese citizens, while H-shares are more freely tradeable. Investors seeking more broad-based exposure to China can opt for China-focused exchange-traded funds, such as the iShares MSCI China ETF and the popular KraneShares CSI China Internet ETF . — CNBC's Michael Bloom contributed to reporting