Portfolio | After US$3 trillion crash discount, BNP says just 24 China stocks are worth buying

Four weeks after the start of the deepest rout in Chinese shares in seven years that has delivered a US$3 trillion-plus discount to previously quoted prices, just 24 of the 2,723 stocks that make up the Shanghai and Shenzhen benchmark stock indices are worth buying.

That is at least according to new research from BNP Paribas Asia-Pacific equity strategist Manishi Raychaudhuri, who has screened the universe of available shares and filtered them by various criteria including price resilience, policy beneficiaries and discounts to fundamentals.

“It’s tempting under the present circumstances to consider the worst performers and select the relatively good companies among those. We include this approach, but it’s not our only method,” Raychaudhuri writes in a note to clients entitled “En Prise” – the chess term that denotes an opportunity to capture an opponent’s piece.

“First, we eliminate stocks with genuine fundamental concerns attached to them – such stocks often correct the most in times like this. Chinese material stocks [aluminium or steel] and Chinese brokers fall into that category. Then we screen through three approaches.”

On price resilience, Raychaudhuri has examined shares that have fallen further than the benchmark index, selecting those that he describes as “fundamentally attractive with visible catalysts” and on which BNP analysts have already issued “buy” recommendations. That screening process captures 10 stocks.

He also selects shares that have outperformed the benchmark during the correction, but according to strict parameters, which again include an existing “buy” recommendation from the bank’s fundamental stock analysts.

“When the markets are in free fall, stocks that haven’t declined or decline only in single digits most likely have something going for them. Insurance, internet and select consumer staples stocks stand out immediately," he says.