‘No bot­tom in sight yet for China stocks’

New Straits Times - - BUSINESS -

SHANG­HAI: Shang­hai is the world’s worst-per­form­ing ma­jor stock mar­ket this year de­spite re­spectable cor­po­rate earn­ings, a dis­con­nect which is feed­ing grow­ing talk that Chi­nese eq­ui­ties are now a scream­ing buy.

Not so fast, say bro­kers and an­a­lysts, who warn shares have fur­ther to fall due to United States-China trade squab­bling, slow­ing Chi­nese eco­nomic growth, and a govern­ment crack­down on debt that is dry­ing up liq­uid­ity.

De­spite China’s still en­vi­able eco­nomic growth of over six per cent, the Shang­hai Com­pos­ite In­dex is down 19 per cent this year and flirt­ing with lev­els not seen since late 2014.

As a re­sult, share val­u­a­tions in re­la­tion to earn­ings are the most at­trac­tive in years, down as much as 50 per cent com­pared with 10year av­er­ages in some cases.

In­vestors are wait­ing to pounce “like li­ons and leop­ards lurk­ing in the grass”, said Zhang Qun, chief mar­ket strate­gist with Citic Se­cu­ri­ties.

“Look­ing at his­tor­i­cal data, val­u­a­tions are def­i­nitely ap­pro­pri­ate (for buy­ing),” he said. “But they could stay low for a while.”

Nervy au­thor­i­ties have be­gun re­peat­edly stress­ing the mar­ket’s over­all at­trac­tive­ness, and a re­port last week by China’s top state think tank touted “his­tor­i­cally low” val­u­a­tions.

“Value has emerged in the stock mar­ket,” it said.

An­tic­i­pa­tion of a re­bound has also been fed, bro­kers said, by ma­jor listed firms snap­ping up their own shares, view­ing them as un­der­val­ued com­pared with the com­pa­nies’ fun­da­men­tals.

But the mar­ket is un­con­vinced: slug­gish trad­ing vol­ume last week hit its low­est lev­els in two years.

The govern­ment be­gan the year on guard against ex­ces­sive share price in­creases, and op­ti­mism was fu­elled by the June in­tro­duc­tion of hundreds of Chi­nese com­pa­nies into MSCI’s global eq­ui­ties in­dices.

The move is ex­pected to even­tu­ally lure bil­lions in for­eign in­vest­ment into Chi­nese shares.

The govern­ment also out­lined plans to en­tice emerg­ing do­mes­tic tech gi­ants to list shares in China rather than abroad, af­ter first-gen­er­a­tion cham­pi­ons like Alibaba and Ten­cent went over­seas.

But 2018’s de­clines are by no means ir­ra­tional, said Brock Sil­vers, man­ag­ing di­rec­tor of in­vest­ment ad­vi­sory Kaiyuan Cap­i­tal.

“The econ­omy is slow­ing, in­bound in­vest­ment is de­clin­ing, credit is wors­en­ing, the trade con­flict is ex­pand­ing, the yuan is weak­en­ing, and global in­ter­est rates are rising,” he said.

“There’s lit­tle hope for pos­i­tive mo­men­tum un­til China’s econ­omy re­vives or it reaches a trade truce.”

No­mura said it ex­pects China’s econ­omy and ex­ports to weaken, has trimmed fore­casts for key China share in­dices, and was shift­ing money away from Chi­nese eq­ui­ties into cash.

BLOOMBERG PIC

De­spite China’s eco­nomic growth of more than six per cent, the Shang­hai Com­pos­ite In­dex is down 19pc this year and is flirt­ing with lev­els not seen since late 2014.

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