Geared for ac­tion

China Daily (Canada) - - HONG KONG -

The lat­est main­land stock-mar­ket rally has ap­par­ently caught many Hong Kong in­vest­ment an­a­lysts by sur­prise, prompt­ing some to ques­tion whether the surge can be sus­tained in the ab­sence of fun­da­men­tal sup­port.

Their ar­gu­ment is based on a sound anal­y­sis of eco­nomic facts. The con­tin­ued down­turn on the main­land is, pre­dictably, hurt­ing cor­po­rate earn­ings. Un­der such cir­cum­stances, the share prices of many listed com­pa­nies, in­clud­ing some of the largest State-owned en­ter­prises, should be reval­ued down­ward.

The Shang­hai bourse’s cur­rent av­er­age price-earn­ings ra­tio of nearly 16 times is sub­stan­tially higher than Hong Kong’s mul­ti­ple of 11.4 times and Shen­zhen’s 11. The Shang­hai-listed A shares of many main­land stocks are trad­ing at a sub­stan­tial price premium to their H shares listed in the SAR.

But main­land in­vestors are show­ing lit­tle con­cern that A shares may be over­priced. The buy­ing spree that pushed up stock prices and mar­ket turnover in the past sev­eral weeks is show­ing no sign of slack­en­ing. The Shang­hai bench­mark in­dex has surged more than 11 per­cent so far this month and is still go­ing strong.

The main driv­ing force be­hind the lat­est rally, as in many cases in the past, is not bullish eco­nomic fun­da­men­tals, but abun­dant liq­uid­ity.

In the past few months, the cen­tral bank has in­jected huge amounts of cap­i­tal into the sys­tem to prop up the econ­omy. Many an­a­lysts have pre­dicted fur­ther cuts in bank in­ter­est rates and the re­serve re­quire­ment ra­tio in com­ing months.

The bulk of the fresh liq­uid­ity has found its way into the stock mar­ket be­cause cor­po­ra­tions, es­pe­cially those in the manufacturing sec­tor, which are grap­pling with the se­ri­ous prob­lem of over­ca­pac­ity, are in no hurry to in­vest in new plants and ma­chin­ery. In­sti­tu­tional buy­ing has ap­par­ently in­spired the army of re­tail in­vestors who are bent on aveng­ing the beat­ing they took dur­ing the stock mar­ket crash ear­lier this year.

It’s not all herd in­stinct, of course. In­vestors are also build­ing up a port­fo­lio of “con­cept” shares ahead of the an­nounce­ment of China’s 13th Five-Year Plan, which is widely ex­pected to place spe­cial em­pha­sis on pro­mot­ing do­mes­tic con­sump­tion and in­no­va­tion in in­dus­trial de­vel­op­ment.

Credit Suisse, for in­stance, has re­port­edly made sub­stan­tial changes to its China A-share port­fo­lio by rais­ing its weight in con­sumer dis­cre­tionary — to 20 per­cent from 14 per­cent — while down­grad­ing some past fa­vorites, such as fi­nan­cials and in­dus­tri­als.

Mean­while, in­vestors’ rush for IT and other new in­dus­trial stocks has re­vi­tal­ized the Shen­zhen ChiNext board, a Nas­daq-type ex­change for tech star­tups that fell off the cliff dur­ing the mid-year mar­ket tur­moil.

The big ques­tion now is: How to in­vest in the new five-year eco­nomic and so­cial de­vel­op­ment plan?

In­sti­tu­tional buy­ing has ap­par­ently in­spired the army of re­tail in­vestors bent on aveng­ing losses.

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