Long cor­rec­tion in A shares may end as 2017 prom­ises profit rise

Pru­dent money pol­icy, ex­pected ‘ag­gres­sive’ fis­cal stance hold key

China Daily (Hong Kong) - - BUSINESS - By WU YIYAO in Shang­hai wuyiyao@chi­nadaily.com.cn

An­a­lysts have a bullish out­look for the A-share mar­ket in 2017, with more con­fi­dence in macroe­co­nomic fun­da­men­tals and com­pa­nies’ prof­itabil­ity.

Fast-grow­ing emerg­ing in­dus­tries have be­come strong driv­ers of China’s over­all eco­nomic growth, par­tic­u­larly af­ter reg­u­la­tors, pol­i­cy­mak­ers and mar­ket play­ers ex­pressed clear views on re­form and trans­for­ma­tion.

Also, the cen­tral gov­ern­ment mapped out growth guide­lines for 2017 last week.

“Mon­e­tary pol­icy is of­fi­cially set to be pru­dent and neu­tral in 2017, but fis­cal pol­icy will not only re­main ag­gres­sive, but also be­come more force­ful and ef­fec­tive,” said Xing Dong Chen, chief economist with BNP Paribas.

“While lim­ited in break­throughs re­gard­ing the SOE re­form, cen­tral eco­nomic pol­icy is com­mit­ted to im­prov­ing pri­vate prop­erty pro­tec­tion and in­creas­ing the gov­ern­ment’s cred­it­wor­thi­ness in or­der to re­gain pri­vate in­vestor con­fi­dence and busi­ness en­thu­si­asm.”

Prof­itabil­ity of com­pa­nies has been re­cov­er­ing based on their per­for­mance in the last quar­ter of 2016. While emerg­ing in­dus­tries’ growth has been ac­cel­er­at­ing, re­forms of State-owned-en­ter­prises and “sup­ply-side re­form” mea­sures have had ev­i­dent im­pact on tra­di­tional in­dus­tries such as coal min­ing and steel mak­ing, which have achieved ca­pac­ity re­duc­tion and re­cov­ery in net prof­its, ac­cord­ing to

Fis­cal pol­icy will not only re­main ag­gres­sive, but also be­come more force­ful and ef­fec­tive (in 2017).” Xing Dong Chen,

Xun Yu­gen, an­a­lyst with Haitong Se­cu­ri­ties.

“It is es­ti­mated that the con­sump­tion, health­care, in­for­ma­tion tech­nol­ogy, and telecom­mu­ni­ca­tions in­dus­tries can main­tain net profit growth at 25 per­cent year-onyear, and tra­di­tional in­dus­tries, in­clud­ing en­ergy and raw ma­te­ri­als, can grow their prof­its at some­where be­tween 20 per­cent and 25 per­cent,” Xun said.

“The over­all A-share mar­ket’s net profit growth is es­ti­mated at 8 per­cent year-onyear at the end of 2017, putting an end to a four-year-long cor­rec­tion.”

Listed com­pa­nies will also see bet­ter liq­uid­ity be­cause their debt ser­vice cy­cle is ap­proach­ing the end, and an­other round of fi­nanc­ing and cap­i­tal ex­pan­sion may start soon in 2017, ac­cord­ing to Dai Kang, an­a­lyst with Hu­atai Se­cu­ri­ties.

“Com­pa­nies’ in­cen­tives for in­ven­tory re­plen­ish­ment and in­vest­ment are ris­ing as fun­da­men­tals are re­cov­er­ing to a much bet­ter level than that at the be­gin­ning of 2016. Th­ese fun­da­men­tals are likely to sup­port com­pa­nies’ prof­itabil­ity growth in the next 12 months,” Dai said.

Com­pa­nies fo­cus­ing on con­sump­tion-driven busi­nesses (foods and bev­er­ages, health­care and med­i­cal ser­vices), pan-en­ter­tain­ment sec­tors (sports, me­dia, and film­mak­ing) and the hos­pi­tal­ity sec­tor (restau­rants, ho­tels and com­mer­cial real es­tate de­vel­op­ers) are likely to see ro­bust growth in rev­enues and prof­its, said a re­search note from Gu­osen Se­cu­ri­ties.

In 2017, in­sti­tu­tional in­vestors will play a big­ger role in the A-share mar­ket since pension funds are ex­pected to be al­lowed to en­ter the mar­ket.

“In­sti­tu­tional in­vestors usu­ally at­tach more im­por­tance to fun­da­men­tals and long-term value. They play the role of an ‘an­chor,’ bring­ing more sta­bil­ity to the mar­ket and re­quir­ing more trans­parency and bet­ter reg­u­la­tions, such as dis­clo­sure and com­pli­ance ef­forts,” said Cao Jian­fei, chair­man of Yuan­shi As­set.

“This will ben­e­fit the A-share mar­ket in the long run and will, in the short term, boost blue-chip stocks which are un­der­val­ued.”

es­ti­mated year-on-year net profit growth of the A-share com­pa­nies at the end of 2017

XING QU / FOR CHINA DAILY

An in­vestor ap­pears unim­pressed by the yawn­ing gap be­tween his ex­pec­ta­tions and ac­tual stock prices at a bro­ker­age in Nan­jing, Jiangsu prov­ince, on Dec 19, when the Shang­hai Com­pos­ite In­dex closed al­most flat.

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