Deutsche Bank Expects Rebound in Hong Kong H-shares, A-Shares Likely to Remain Volatile

July 8, 2015 5:47 PM EDT

REUTERS/Kim Kyung-Hoon/Files

Deutsche Bank analyst Florent Robert expects a rebound in Hong Kong / H-shares following recent spillover from China's margin-related sell-off. The A-share market will remain "extremely volatile," in his view.

"While the sell-off in Chinese stocks has been occurring over the last month, this week we have seen panic spill over into the Hong Kong market as investors sell “what they can” amidst limited hedging options for China A-shares and a significant portion of the market being suspended," said Robert.

"We believe this is overdone at this stage with both the HSI and HSCEI having given back all / most of their post-Stock Connect gains. DB’s China Strategist, Yuliang Chang, believes that we may see a technical rebound on further government support as the PBOC steps in to stem a further exodus of small-cap liquidity."

The analyst continued, "The broader A-share market is likely to remain extremely volatile and under short-term pressure until the string of stock suspensions end and the market gains confidence that margin selling pressure has ebbed. That said, we feel that the Hong Kong / H share selloff in sympathy is likely overdone at this stage. We think the potential short-term binary nature of the markets makes playing a rebound through options attractive."

Robert added, "While this may not have been fully exhausted, we feel that fundamentally the “sympathy sell-down” is overdone at this stage with the HSI down 13% and the HSCEI down 20% over the last month," Robert added. "Our preferred “bounce back” index target is the HSI. The HSI is a somewhat “innocent bystander” given it has the least direct exposure to the A-share market with only 27% of the index dual-listed in the A-share market and 41% of weight in non-China pure play stocks. At 11x consensus forward P/E and with a 3.5% dividend yield, we feel that the HSI is approaching levels where it should attract significant fundamental support."

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