Chinese stocks are the cheapest that they have been since the last financial crisis and investors should be positioning for a rebound, which a senior strategist says will happen in the second half of the year.
"Valuations in China are absolutely through the floor," Chief Investment Officer of DBS Private Bank, Lim Say Boon, told CNBC on Thursday. "If you look at price-to-earnings ratios, forward price-to-earnings ratios, price-to book-ratios, we had gone below Lehman levels."
The Shanghai Composite Index is trading at 12.2 times price earnings, and the Hang Seng Index 8.9 times, compared to MSCI Asia Pacific ex Japan Index's 13 times and the S&P 500's 17.3 times.
Lim says China’s money supply growth, or the M2, which is struggling at cyclical lows, will show an uptick by the end of this year as the central bank embarks on more easing measures to support growth, which will in turn have a positive impact on stocks.
“My thinking on this is: the Shanghai Composite Index’s year-on-year growth should be related to China's money supply year-on-year growth," Lim said. "The M2 is at levels which barely just accommodate China's nominal GDP growth. We think it's going to go up…we think China is going to be a very attractive market in the second half."
Lim is expecting two more cuts to the reserve requirement ratio for Chinese banks, after similar moves in February and November. He does not anticipate cuts in base lending rates.
According to him, the current pullback in Asian stocks is temporary, and markets will trend higher later this year boosted by stimulus measures. More help for Europe's banking system by European Central Bank is "inevitable" and the U.S. Federal Reserve could arrange a third round of bond-buying if necessary, he added.
"We are looking at 10 to 15 percent downside from March highs," Lim said. "You get the beta right, you will be doing quite nicely, because the stimulus kicks in, we are likely to see the markets push above March highs over the second half of the year."
Chinese banking and consumer stocks could be the biggest beneficiaries of rebound, says Lim, adding that selective property credit plays could fare well too as “yields have been through the roof because of fears of what's been going on in the property sector”.
“We're focused on the largest names. We like Evergrand, Agile, maybe Shui On. These are the really big ones that we think are likely to weather the storm well,” he said.
Lim’s optimism is shared by Cedric Ma, Senior Investment Strategist at Convoy Asset Management, who told CNBC earlier this year that Chinese stocks will have the biggest upside potential in 2012, after spending most of last year in negative territory.
However, perennial market bear Marc Faber remains bearish on the market.
"The fact is simply when you look at the performance of Chinese stocks, they tell you more than what the bullish economists and strategists tell you," the editor and publisher of the Gloom, Boom and Doom report, told CNBC over the weekend. "The Shanghai stock market has had one of the worst performance in the world for the last three years."
Even with the rebound this year, the Shanghai Composite Index has lost more than 30 percent over the past 3 years, compared to the S&P500 Index, which has nearly doubled.