Worst over, A shares will recover in fourth quarter, analysts say

China's A-share market may have bottomed out already, so a marked recovery in the fourth quarter of the year might ensue, given the improving economic momentum and investor sentiment, said analysts of investment banks and asset management firms.

Wendy Liu, JPMorgan's chief Asia and China equity strategist, said the CSI 300 Index may register a marked rally in the fourth quarter as the A-share market has hit the bottom in the medium term.

The CSI 300 Index may rise to a range of about 4200 points to 4600 points in the fourth quarter, led by consumer stocks and new-economy companies that have seen stable earnings growth, Liu said.

According to Liu, the most notable earnings recovery is mainly seen in leading players in the discretionary consumption sector and the internet industry based on second-quarter financial results. Business prospects in sectors such as tourism, sporting goods, education and new energy vehicles are all showing a positive trend.

On Monday, the CSI 300 Index shed 0.65 percent to close at 3714.6 points, dragged by financials and real state companies after the index hit 3664.77 points on Friday morning, the lowest level since early November. A target range of 4200 points to 4600 points would indicate a rise of about 13 percent to 24 percent from Monday's close.

James Wang, head of China strategy at UBS Investment Bank Research, said China's equity market may have bottomed out following recent corrections, as hinted by some technical indicators and leading economic indicators.

The A-share market historically generated an average return of 8 percent in the three months after the market saw foreign monthly capital outflows as much as what was recorded recently, Wang said.

A net total of 89.68 billion yuan ($12.26 billion) flowed out of the A-share market in August via northbound trading of the connect programs between the mainland and Hong Kong exchanges. The pace of outflow has slowed this month as the amount of outflow came in at 27.97 billion yuan from the beginning of the month to Monday, according to market tracker Wind Info.

"Furthermore, economic fundamentals such as the manufacturing purchasing managers index and credit impulse have shown improving trends — historically there has been a reasonable correlation between these factors and the equity market performance," Wang said.

The official manufacturing PMI came in at 49.7 in August. Though the figure remained in the contraction territory, the index has increased in three consecutive months amid improving business prospects and may return above the boom-bust line of 50 this month, experts said.

David Huang, a senior investment strategist at AllianceBernstein, a global asset management firm, said recent market corrections have actually created a good timing for bottom fishing given Chinese listed companies' robust long-term growth potential.

Huang said: "China is now still at the middle-income stage, and its future economic growth is likely to exceed most developed countries, which means that the profit growth prospects of many (Chinese) listed companies are still promising.

"Therefore, we believe that given that right now the valuation level of A shares is below the long-term average, it's actually a good time to look for valuable investment opportunities."

Wang at UBS added that historically, the best-performing sectors following market troughs were internet, including e-commerce, and various consumer subsectors such as restaurants, leisure and beer.

"Our portfolio construction is geared toward those sectors though we have included expressways for defensiveness," Wang said, adding that the least preferred sectors remain airlines, banks, materials and autos.