Can Chinese stocks rally further? One investment bank thinks so — and names its top stock picks

The recovery in Chinese stocks gained steam on Monday, as China’s benchmark index came within striking distance of a bull market. The CSI 300 Index, which tracks the largest mainland-listed stocks, closed 0.5% higher in Monday trading — a whisker shy of a 20% jump from its 52-week low seen at the end of October last year. Chinese stocks have been buoyed by Beijing’s easing of Covid-19 restrictions and a waning regulatory crackdown. But some Wall Street analysts think the bull market might have run its course. “We started the year with an overweight call on China, and while that is a consensus view, there are now concerns on China rally being too sharp/too quick. The extreme inflows in the past 3 months, indeed, pose a threat to the continuity of market rally for next 3 months,” Bernstein analyst Rupal Agarwal wrote in a note on Jan. 27. Nevertheless, the bank believes investors still have a chance to jump on the China bandwagon, albeit in a “selective” manner. How to play it One of Bernstein’s preferred plays is stocks that have underperformed the market over the past 12 months — described by the bank as “12-month laggards.” The bank noted that these laggards have historically delivered the highest returns during a macro recovery. Bernstein also likes undervalued stocks that are trading below their 5-year average price-to-earnings ratios. It noted that with the exception of health care, all other sectors are still trading at-or-below their 5-year averages. Some sectors, such as energy, financials, tech, and utilities, are even trading below their 20-year averages, the bank added. Bernstein’s screen for undervalued stocks that have underperformed the market rally tuned up a raft of names. Alibaba , Tencent and JD.com were among the big tech names that made the screen. Within the financial sector, ICBC Bank and Ping An Insurance made the bank’s list. The screen also turned up Geely Automobile and Great Wall Motor within the auto sector, and WuXi Biologics and Air China also made the cut. Longer-term picks Bernstein also has several stock picks for the longer term. The bank uses a combination of quantitative and fundamental approaches to differentiate “winners from losers in Asia” over the longer term. “We found that stocks that were attractive on both counts outperformed the market by 9.3% a year since 2013,” the bank’s analysts, led by Ann Larson wrote in a separate note on Jan. 30. Chinese electric vehicle maker Xpeng is one such winner. Bernstein likes the company for its favorable price momentum and attractive “risk-reward profile.” It gives the stock a price target of $16 for the company’s U.S-listed shares, which ended Friday at $10.69. Internet firm Kuaishou Technology also made the list for its continued “solid engagement growth” and expected improvement in margins. The bank gives it a price target of 90 Hong Kong dollars ($11.50). It closed on Friday at 68.60 Hong Kong dollars. — CNBC’s Michael Bloom contributed to reporting