Buy or avoid China? The pros share their take — and stock picks

Published Thu, Jan 25 20246:43 PM ESTUpdated Fri, Jan 26 20248:53 AM EST

Is it time to buy China, or should investors continue to avoid this market? Quite a few developments surrounded the Asian giant this week. Chinese stocks dropped to an almost five-year low last week, reflecting persistent bearishness from the past year. But this week, China embarked on monetary easing as it pledged to reduce the amount of liquidity that its banks are required to hold as reserves. Reserve ratio requirements for banks will be cut by 50 basis points from Feb. 5. Its central bank also said Wednesday that there's room for further easing. Earlier this week, Bloomberg News, citing sources, reported that China is considering a $278 billion package to rescue its stock markets. Is it time to get back into Chinese markets? Investors have been avoiding them, in light of factors such as the property debt crisis, which has triggered financial risks through the broader economy, as well as deflation. Here's what analysts are saying. Buy when there's 'blood in the streets' Brendan Ahern, chief investment officer at KraneShares, acknowledged that China markets are facing "peak pessimism," but that there can be "some pretty explosive rallies" at these levels. "I think you cannot go long naked. I think you have to kind of protect yourself using options strategies or structured notes. But we know as professionals we should be buying, that when there's blood in the streets, this is when you buy — you just have to be very careful," he told CNBC's " Street Signs Asia " on Thursday. Andrew Lapping, chief investment officer at Ranmore Fund Management , says the sharp decline in China markets is an "opportunity." "Over the past year, the S & P500 is up over 20% while the Hang Seng is down 30%. There is no way the underlying business values have diverged to this degree," he said in a Wednesday note. "This underperformance, particularly over the past month, has given us the opportunity to buy high quality, well-capitalised businesses at very low prices - an exciting opportunity," he added. Winnie Wu, chief China equity strategist at BofA Securities, believes that although China's economy has weakened, its problems are "not as terrible as what the stock market has reflected." "So the stock market is certainly putting much higher equity risk premium ... there are also concerns about policy direction, policy clarity ... I think these measures to stabilize the stock market helps like rather than putting a floor to stop some of this capitulation," she said. Renowned value investor Guy Spier was less optimistic, saying that the $278 billion package won't be enough. "The markets are a strange beast that won't be fixed by throwing state money at the problem. The CCP have to take a hard look at their policies and start listening better to the needs of business," he told CNBC's Tanvir Gill. But he believes that the government will get it right — eventually. "Of course China can and China will bounce back," he said. "China did an about-turn on its Covid policy, so I think that they are also capable of adjusting their business – unfriendly policies of the last few years." How and when the market will recover Two things need to happen before the stock market can turn around, according to Wu. The first is that consumers need to regain their confidence in the property sector, she said, adding that 2024 "will be the most difficult year" for the sector. Next year, more government projects in terms of social housing and reconstruction will kick in and support commodity demand, she added. "On the other side, China needs to convince investors what's going to be the new growth driver, what's after property, and is that going to be big enough for employment to drive your 4%, 5% or 3% GDP?" Wu said. Wu predicts that a market turnaround can happen in another 12 to 18 months. "We are getting into this adjustment … trying to reduce the reliance on property … into something high tech – advanced manufacturing," she added. Ahern, for his part, said the government needs to continue its efforts to restore investor confidence. "There has been a change in the tone and tenor of the government to foreign investors, foreign corporations. That confidence isn't going to come back overnight but they have to keep moving in this direction. They have to keep being transparent on what the next actions are going to be," he said. How to invest French asset management company Amundi said that there is a renewed focus on tech and the energy transition. In artificial intelligence, for instance, China is "quickly closing the gap" with the United States in AI research. It's also leading in quantum computing, Amundi said. JPMorgan and Morgan Stanley likes these top U.S.-listed Chinese tech stocks. Amundi noted that China has been the biggest investor in clean energy in the past decade, and is now the largest producer of solar panels, wind turbines and electric vehicle batteries in the world. One chief investment officer likes this Chinese EV stock and a mining stock to tap the energy transition. UBS said in a Jan. 17 note that investors should adopt a barbell strategy by holding stocks in recovery beneficiary sectors such as consumer, internet and industrials, as well as high-yielding stocks in defensive sectors such as banks, insurers and utilities. The latter category can "navigate through market volatility in case further policy support falls short of expectations." A barbell strategy strikes a balance between reward and risk by investing in high and low-risk assets. "For the longer term, we prefer sectors benefiting from strong policy tailwinds, including industrial automation, digitalization, electric vehicle (EV) supply chain, and renewable energy," the bank said. UBS likes these stocks: China internet: Alibaba , Baidu , NetEase . Industrials: China Communications Construction. Banks and insurance: China Construction Bank , Ping An Insurance . Renewable energy: China Longyuan Power Group, China Resources Power. — CNBC's Tanvir Gill, Michael Bloom and Evelyn Cheng contributed to this report.