Jack Ma (center, in yellow T-shirt), founder and executive chairman of Alibaba Group, visits the Computing Conference in Hangzhou, Zhejiang province, in October. Overseas shares of companies such as Alibaba and Tencent have bright prospects, market analysts said last week. NIU JING/CHINA DAILY

Experts say solid fundamentals, healthy financials will impress share investors in Q4

The ongoing rally in the Chinese equity market rally is not a bubble but is well supported by improved profitability of listed companies whose valuations are returning to a rational level, according to UBS Asset Management Co.

The bullish momentum is likely to continue in the fourth quarter of 2017 and into 2018, said UBS AMC, which has assets under management of $703.28 billion worldwide as of June 30, and is among the world's largest asset managers.

Shi Bin, its lead portfolio manager in China, said the rally in A shares and H shares is well supported by fundamentals. "China is one of world's largest and fastest-growing economies, with an increasing number of (Chinese) enterprises enjoying an advantage in the global competition."

Investors holding blue chip stocks and shares of large-cap companies are well placed, he said. "Such shares were undervalued and now the valuations of the companies are starting to return to a reasonable level."

Stocks of leading players in various sectors appear to be good bets for investors given that 222 large-cap A shares will be included in a key MSCI emerging markets index from June 2018.

"There is no bubble in large-cap shares as earnings continue to grow, and valuations are only half of that of their global peers," Shi said.

The potential for growth in overseas shares of companies such as Tencent and Alibaba is great, as their go-global strategy is still nascent. For example, overseas markets contribute just 8 percent of Tencent's total revenue, suggesting there is immense potential for growth.

A changing economic structure, where the services sector will contribute more and more to the GDP, will also present high-growth opportunities, he said. "Surging healthcare, education, and automation sectors bring rich investment opportunities."

Exports are also supported well by industry's transformation and upgrading of the manufacturing sector, with more Chinese value-added products selling across the world, he said.

Shares of China's large bluechip companies are among those that are most likely to continue to rally in the last quarter of this year and early next year, as overseas investors, mostly institutional investors, are likely to add to their current holdings, in the wake of the MSCI index news.

Several institutions, including CICC, have a bullish outlook for A shares in 2018. CICC said it expects "double-digit" gains for the A-share gauges by the end of 2018.

"Growth will continue, and systemic risks will decline, which should give investors mid- to long-term investment opportunities in the China market," said Wang Hanfeng, an analyst with CICC, in a research report.

Investors will likely reconsider valuations of China assets given the turbulence and the subsequent rally this year, focusing on fundamentals and big trends like urbanization, growth of new economy and integration of booming internet-based technologies and traditional services, the report said.

It further noted that in the next three to six months, bullishness will mark hardware, consumption, insurance, brokerages and mid-size banks, which have adopted a prudent and stable approach to development.

The report forecasts 8.4 percent gain for financial A shares and 16.1 percent gain for non-financial A shares.