Analysis: Oversold China catches the eye of investors

Sun Jul 28, 2013 9:06am EDT
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By Gertrude Chavez-Dreyfuss

NEW YORK (Reuters) - A slowdown in China has hit its financial markets hard this year as fund managers cut exposure to the world's second largest economy, but some investors say it may be time to jump back in.

The country's downturn is being felt around the world. Energy and materials stocks have been hit, commodities prices are lower, and the currencies of China's trading partners, including Australia, Taiwan and South Korea, have tumbled.

The index of the leading Shanghai and Shenzhen A-shares - the CSI300 .CSI300 - was down 11.8 percent this year, while the Shanghai Composite Index .SSEC slumped 11.4 percent. Lipper data shows five straight months of outflows from China equity-focused funds.

A recent Bank of America-Merrill Lynch survey lists a China slowdown as the biggest worry among big fund managers. On Friday, China's industry ministry ordered companies across 19 industries to close outdated capacity by the end of September.

But some investors believe the selloff is nearing an end as officials take steps to boost demand.

"China has become one of the cheapest in Asia for an economy that has $6 trillion in national savings and a fraction of the debt that developed countries have," said Joe Portelli, chief investment officer at FMG in Malta, with assets of about $200 million invested exclusively in emerging and frontier markets.

Portelli said China's price-to-earnings multiple is 10, much lower than the S&P 500's P/E ratio of 15 and the historic P/E ratio for Chinese stocks in the mid-20s.

FMG's China Fund invests in China's A shares listed on the CSI300 index. It is down about 3.8 percent so far this year.   Continued...