(Bloomberg) – Recent punches in Chinese markets have made their valuations attractive against almost everything, but bulls may find they need strong nerves to stay the course in a country that has repeatedly shocked global investors this year.

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The reason a lot of the sell side is more confident in China right now is that things can’t get much worse. Analysts and investors are betting prices are already reflecting a slowdown in the real estate market, lower growth and President Xi Jinping’s campaign to shake up private enterprise.

Still, the drumbeat of negative news threatens to drown out the increasingly optimistic tone found in analysts’ notes. Beijing on Wednesday condemned the United States’ latest overture to Taiwan. China’s intervention in coal markets on Thursday pushed futures contracts down by the daily limit. A real estate stock fell a record 18% as the company could struggle to refinance dollar debts that total $ 11.6 billion. Investors will know whether China Evergrande Group has avoided default when a bond coupon payment deadline expires on Friday.

Peter Garnry, head of equity and quantitative strategy at Saxo Bank, remains cautious. Analysts at Credit Suisse Group AG agree, saying it is “too early to return to China.”

“Our view of China has not changed,” Garnry said. “It’s not cheap given the risks in the housing market, debt markets and changing supply chains. China’s zero covid policy will also continue to create hurdles for the economy. In addition, China’s “common prosperity” will create more distribution, equality and a less positive climate for listed companies. “

Others are much more optimistic. This month alone, HSBC Holdings Plc, Nomura Holdings Inc. and UBS Group AG turned positive on Chinese stocks, citing reasons such as cheap valuations and fear of Beijing regulation. The asset managers BlackRock Inc. and Fidelity International Ltd. are buyers, while Morgan Stanley recommended holding the country’s speculative-grade debt because prices had fallen too much. Betting on a stronger yuan is a given to many currency analysts.

The October rebound gives them confidence. Chinese stock market indicators are heading for their best month since January. The country’s junk bonds last week rose the most in 18 months. The yuan is close to the strongest in five years against a basket of trading partners.

“Sentiment has taken a bigger hit than fundamentals,” wrote Fidelity portfolio manager Dale Nicholls, one of the first global investors to publicly favor Chinese assets, on October 6. “Investing is all about risk-reward and to many names that sounds good.”

But growing optimism is not a shield against losses – as seen earlier this year, when stock analysts were the most bullish in a decade and the technology was so popular that Tencent Holdings Ltd. was briefly worth nearly $ 1 trillion.

There are plenty of risks. Unlike the rest of the world, China is sticking to plans to eliminate local transmission of Covid-19, even as it battles sporadic outbreaks. The economy is showing signs of a further slowdown with car and home sales dropping this month, and a number of economists have lowered their growth forecasts for this year and next.

China is reluctant to stimulate the economy because of its determination to deleverage the real estate market and reduce financial risk. The policy has exacerbated the crisis at Evergrande and other indebted developers, with at least four dollar debt payments missing this month. Struggling real estate companies, which account for about a third of China’s record defaults on dollar bonds this year, face a bigger test in January – when maturities more than doubled from October, according to Citigroup Inc.

There is no doubt that Chinese stocks and credit were lagging behind their global peers. The MSCI China Index plunged 18% in the third quarter, its biggest underperformance relative to the world in 20 years. Xi’s shock moves to gain greater control over entire swathes of the private sector have raised concerns that the country’s stocks are “non-investable.” Cathie Wood, founder and CEO of ARK Investment Management, warned that Chinese markets will be under valuation pressure for “a long time”. Billionaire George Soros has advised investors against looking for bargains on Chinese stocks.

The panic became so severe in the credit market that speculative grade yields exceeded 20% and spreads against Treasuries widened to a record high – levels that made little sense to investors. Morgan Stanley credit analysts.

With valuations this low, global funds are returning to China. The MSCI China Index still trades at just 1.94 times book value, compared to a multiple of 3 for its global counterpart. The gap is close to the largest on record. Investors had become “too bearish,” wrote strategists at HSBC Holdings Plc in an October 26 note.

Buying Chinese assets after such heavy losses can be a winning strategy, as it was for those who did at the start of last year. The country’s stocks and currency, which had fallen weeks before the pandemic shocked markets elsewhere, outperformed much of the world in 2020.

But in China, the dynamics tend to change quickly.

“Reverse trading can conclude what we saw in October,” wrote Gilbert Wong, head of quantitative research for Asia at Morgan Stanley on Wednesday. “We remind investors once again that this rally may prove short-lived.”

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