Equity analysts urge cautious optimism
Experts say resilience of economy, company prospects and government policies bode well
“There has been less price distortion in the market,” Chen says. “When small-cap stocks become much more expensive than the big blue chips, you begin to worry about bubbles. But this year, the market has been led by the good performance of large-cap stocks with solid fundamentals, allowing rational value investors to make money.
“The speculative mood has also weakened because of the tighter regulation to curb risky investment as well as less enthusiasm from momand-pop investors.”
Looking to next year and beyond, analysts say the resilience of the Chinese economy, the earnings prospects of Chinese companies and the government’s ability to manage growth deceleration and credit risks will mean the country will continue to offer opportunities for investors.
“When we talk about the China opportunity, first and foremost we are interested in how the Chinese economy develops. We really care about whether China succeeds in having this moderate growth path and a change of economic composition toward more consumption,” says Rick Lacaille, global chief investment officer at State Street Global Advisors.
In the investment company’s view, the markets are overstating debt fears and underestimating China’s growth prospects, which may provide a window in 2018 for investors to gain long-term strategic exposure.
Gao Ting, head of China Strategy at UBS Securities, said in a research note that the recent market pullback will likely be short-lived, noting that earnings growth estimates for 2018, and the current market valuations, suggest a further upside for both onshore and offshore Chinese equities.
The fact that the Chinese stock market is evolving toward a more mature market and becoming more integrated with the global markets is also making Chinese equities more appealing to international investors, analysts say.
Market players welcome the beginning of a shift in emphasis toward shareholder returns, the institutionalization of the market and signs of change in China’s dividend culture.
Meanwhile, the stock connect programs that gave overseas investors greater access to the Chinese mainland shares, and the expectation of inclusion of the A shares in the MSCI emerging markets index next year, will likely fuel more positive sentiment.
“As the ownership of Chinese assets becomes more globalized, the positive aspect of that is that volatility may be lower,” says Lacaille.
Ning Jing, portfolio manager at Fidelity International, sees investment opportunities in China’s structural changes. “The emphasis will be on ‘quality over quantity’ of economic activity in China. We are likely to see a renewed thrust on reforms across State-owned enterprises, as well as in energy pricing and pro-environmental policies,” Ning said in a report.
“I continue to focus on opportunities arising from the long-term structural changes that are underway in China. At the sector level, I have noteworthy exposure to energy, materials and financial stocks.”
While China may continue to offer compelling investment opportunities in 2018, some analysts are more cautious about potential volatility in the market, saying investors should watch out for tighter liquidity conditions in the new year.
Hong Hao, chief strategist at BOCOM International, expects the A-share market to be tepid in 2018, with bouts of brief volatility due to changes in liquidity conditions.
“Shadow banking growth is curtailed, and the new regulations are targeted at the stock of off-balancesheet leverage that has been accumulating with increasing layers of complexity to evade regulatory supervision and capital requirements in the past few years,” he says.
Hong believes that investment opportunities will likely emerge in smaller-cap stocks, which he says have underperformed this year.
“Large-caps have run hard in 2017 and their relative outperformance is approaching (an) extreme (end),” he says.
“The rotation from large-caps back to small-caps will zigzag before the trend becomes apparent for most. Some large-caps will continue to perform, but it’s unlikely that the strength will be ubiquitous.”