UBS: Buy China

UBS thinks the ‘roller coaster’ ride for Chinese stocks is almost over.

The Shanghai Composite Index caught everyone’s attention when it surged 150% for about a year, outpacing virtually every other stock market in the world.

The index peaked on June 12, and then crashed.

But in a note on Wednesday, UBS strategists say they think the worst is over, and this may be a good opportunity for investors to get back in.

Here’s UBS’ Wenjie Lu and Steve Yang (emphasis and link ours):

Despite the recent heavy-handed policy measures, we believe foreign investors should not forfeit the opportunities in Chinese equities. It is natural for unsophisticated retail investors to learn the risks of new financial products, including margin financing, leveraged ETFs and derivatives. It is equally natural for regulators to rely on some trial-and-error in a fast evolving capital market. An encouraging sign both during and after the stock market correction, is that Chinese leaders have stayed committed to structural reforms which are ultimately the driver for a stock market re-rating.

The strategists make three points to support their argument that the ‘roller coaster’ is stabilizing:

  • Margin financing, or the use of borrowed cash to buy stocks, is collapsing. It was one of the things that sped up the crash. Investors needed to sell stocks for cash to pay back loans, so that banks could balance their accounts. Margin financing by securities companies peaked at RMB2.3 trillion in June, UBS notes. It is fast falling from the top, and the analysts estimate it’s down about 40%.
  • The number of suspended stocks is also falling. About half of all Shenzhen and Shanghai suspended trading as the market crashed.
  • A stock market crash is not likely to damage China’s economy in a big way. The strategists note that entire financial system is dominated by the banking system, which makes up about 2% of the stock market. The companies and mutual funds that rely on the stock market are only about 5% of the financial system. And overall, the impact of a slower stock market on economic growth will likely be offset by the government’s fiscal and monetary policy actions.

Until last Thursday, the Shanghai Composite fell about 30% and erased all the gains made between April, May and June.

And according to UBS, we may have seen the worst.

Screen Shot 2015 07 15 at 12.31.25 PMYahoo FinanceThe Shanghai Composite over the past year.

NOW WATCH: Here’s what it’s like to ride on the epic half-mile-long wooden roller coaster in China

Business Insider Emails & Alerts

Site highlights each day to your inbox.

Follow Business Insider Australia on Facebook, Twitter, LinkedIn, and Instagram.