Shenwan Hongyuan last week warned that a US recession next year, stoked by aggressive rate increases by the Federal Reserve, will impinge on the outlook for Chinese stocks.

Chinese stocks have been a lemon this year with a 24 per cent slump in the MSCI China Index. Its top five members, namely $Tencent (TCEHY.US)$ , $Meituan ADR (MPNGY.US)$ , $Alibaba (BABA.US)$ , $JD.com (JD.US)$ and $CCB (00939.HK)$ , took a 13 to 30 per cent beating.

However, the recovery in November and December suggests the market may be ready for a sustained turnaround. Hong Kong stocks also had the most powerful rebound in over 20 years with the Hang Seng Index soaring 27 per cent in November. The CSI 300 Index of onshore stocks jumped 11 per cent in the same period.

Shenwan Hongyuan last week warned that a US recession next year, stoked by aggressive rate increases by the Federal Reserve, will impinge on the outlook for Chi...

“The fundamentals remain under pressure currently and the expectations on corporate earnings are low,” Cai said. “Our data shows that we are near historical low in terms of flows into China equities, which indicates significant potential returns [as and when new positions are added].”

The Hang Seng Index has already underperformed the Shanghai Composite Index for four years, which has never happened in history, he noted. Hong Kong-listed stocks are thus more undervalued, and with short-selling at a historical high, he added.

Investors should use different strategies for the first and second half of next year, Cai said. The Federal Reserve is likely to continue its policy tightening campaign into early next year, and stocks in Hong Kong will experience more volatility compared with onshore peers.

“Add positions when [the market is] oversold, and hold for a rebound in the second half,” he added.