Geared for action
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.