Eq­uity an­a­lysts urge cau­tious op­ti­mism

China Daily European Weekly - - Business -

Ex­perts say re­silience of econ­omy, com­pany prospects and gov­ern­ment poli­cies bode well

Co Ltd.

“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.”

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