CHINA STOCK ROUT CONCERNS SEEN OVERDONE
Investors overly pessimistic, say fund managers who see limited downside potential
CONCERNS that a sharp fall in Chinese stocks this year will turn into a rout as China and the United States exchange barbs on trade are overdone, say some investors.
By some estimates, the stock market is pricing in sharper downgrades in corporate earnings for next year than analysts are forecasting, suggesting that investors are overly pessimistic.
Instead, these fund managers, investors and equity analysts see limited downside potential for Chinese stocks, pointing to relatively low valuations historically and signs that some buyers are starting to put money back into the market.
Shanghai’s benchmark equity index fell as much as 18.6 per cent to 2,691 points by early this month, making it the worst performing major global index. It has since edged back up to 2,859.
“Why is the market so weak? Because investors are pessimistic, or more precisely, overpessimistic,” said Zhou Liang, founder of Shanghai Minority Investment Management, a private fund house largely invested in banks, insurers and developers.
Indeed, the forward priceearnings (PE) ratio of the Shanghai index, based on earnings expectations for this year, is around 10, the lowest level since panic selling in early 2016 when the market was still dealing with the hangover from the 2015 financial crisis.
They are also 40 per cent lower than forward PE ratios in US stocks.
The drop in Chinese shares this year has been driven by concerns about a slowdown in the world’s second-biggest economy and that China would be worse off in a trade war with the US.
US President Donald Trump, who has taken a hard line on trade with several countries around the world, has applied tariffs to some goods imported from China and threatened taxes on the remaining imports.
These factors have prompted an overly pessimistic view on the corporate earnings outlook for 2019, says Societe Generale.
“The market is discounting a five per cent decline in next year’s earnings,” said the bank in a research note, when analysts’ consensus forecast was for a rise of 13 per cent.
Gao Ting, head of China strategy at UBS Securities, says Chinese stock values are signalling that China’s economic growth will slow sharply.
“Interestingly, the overall situation we see is not that terrible, both in terms of economic fundamentals, or corporate profit.”