Chinese stocks currently look “very, very attractive”, but are unlikely to see a rapid recovery in the coming months, according to Kelvin Tay of UBS Global Wealth Management.

“I think China is cheap. If you look at how China has performed this year, on a relative basis it has actually underperformed by about 40% against the European indices as well as the US indices.” , said Tay, regional investment manager. at UBS Global Wealth Management, told CNBC’s “Squawk Box Asia” Tuesday.

At market close on Tuesday, the Chinese CSI 300 index, which tracks the largest listed stocks on the mainland, fell nearly 5% for the year. In Hong Kong, where many Chinese tech titans are listed, the Hang Seng Index fell more than 14% during the same period.

By comparison, the S&P 500 on Wall Street hit a new high – its 69th in 2021 – as late as Monday. In Europe, the pan-European Stoxx 600 gained more than 22% for 2021 at Tuesday’s close.

“From a valuation perspective, from a positioning perspective, China certainly looks very, very attractive,” Tay said.

He warned, however, that the Chinese market is unlikely to recover in the next three months due to a “glaring lack of catalysts” currently. He cited the need for China’s real estate space to take hold before the market can recover.

Investors have largely shunned the Chinese real estate sector this year amid concerns about defaults as developers faced a credit crunch. In December, a real estate developer in debt China Evergrande Group slipped into default after failing to confirm debt payment.

“We think things are really starting to change, but it’s just that, you know, on the issuer front, on the Chinese high yield front, you’re probably always going to get some news, some negative news on a few of the developers. explode, file default returns, file bankruptcy, ”Tay said.

Such negative developments are likely to hurt sentiment, he warned: “If sentiment is fragile in the Chinese market right now, any small negative news is likely to be amplified and become significant, which in turn is likely to be significant. in turn will really affect the market as a whole. “

Looking ahead, Tay said that Chinese companies listed in Hong Kong – which have been “really, really badly beaten” this year – are “likely to be much more attractive” compared to their peers on the mainland.

“The policy is likely to tighten, we think most of this is actually over,” said the chief investment officer. “What you’re going to do in the future is probably fine-tuning the measures and not, you know, triggering a system overhaul similar to what we had in the tuition industry in July. of this year.”

Another factor that should give relative boost to Hong Kong-listed Chinese equities is the expectation of the yuan to weaken next year.

“The renminbi has been very, very strong,” Tay said. “The government has in fact stressed a few times that it is not entirely comfortable with the renminbi’s outperformance against other currencies over the past six months.”

Since Wednesday afternoon, during trading hours in Asia, the The onshore yuan has strengthened more than 2% against the dollar for 2021, while its offshore counterpart has gained nearly 2% against the greenback.

“We expect the renminbi to weaken in 2022,” Tay said, adding that this would likely affect the performance of Chinese stocks listed in mainland China given their “very close” correlation to the yuan.