Friday, March 06, 2009

Views On Chinese Equities


  • Feb 24: After rising by 1/3 in early 2009, Shanghai Composite equities pared their gains to 20% as global and Chinese outlook worsened.
  • Many of the new loans extended in December and January may have found their way into the equity market as investors seek better return on assets, this could imply that the lending surge is not being invested in sectors that will boost growth- and that stock market gains are vulnerable especially given that chinese equity returns have become more correlated with global trends
  • Shenzhen equities rose 38% (Feb 16). The CSI fell 65% in 2008 as worsening global outlook, higher costs squeezing corporate profits, falling bank profits and government intervention are weighing on equities.
  • Shanghai Composite Index, rose 9.3% in January, including three weekly gains before closing for the new year holiday. The Chinese equity market has rebounded since fiscal stimulus was announced in November 2008.
  • Index may head towards the 200-day moving average at 2578 before a pullback. After the completion of a pullback, the index is expected to approach 2850 or 0.236x retracement level of the decline from the peak of 6429 (UOBKH)
  • Citi: telecom and energy sectors may underperform, while highly geared companies, like financials, are likely to outperform Yet margin contraction, rising credit costs and decelerating fee income momentum will create downside risks for banks
  • Policy responses
  • The government will ban cross-border fund flows, push publicly-traded companies to return more money to investors and toughen rules to punish insider trading
  • China's cabinet approved a trial program for margin trading and short-selling even as other countries have imposed curbs on short selling. Shorting stocks could allow investors to hedge exposures but could be more destabilizing in the short-term
  • China may allow investors to sell bonds that can be swapped for shares and may use brokerages as intermediaries to sell their shares rather than secondary market to ease pressure on share prices
  • The Chinese equity market continues to be speculative because hedging tools are limited (deterring institutional investors) information on the companies is limited (Pettis) Level of government meddling in the market makes true transparency difficult (Hewitt) Many retail investors (who led the boom in 2007) have retreated to demand deposits
  • Volume: Shares worth an average 118 billion yuan ($17 billion) changed hands every day on the Shanghai and Shenzhen stock exchanges early in 2008, 38% less than in 2007 (Bloomberg)
  • Credit Suisse: the four most undervalued sectors are energy, materials, real estate. Consumer staples are relatively overbought
  • Chinese equities may now be more susceptible to global outlook good or bad despite limited foreign investment in mainland equities. But it has also been driven by factors particular to China including previously high valuations, worries that anti-inflation measures would crimp growth
  • Anderson: A-share capitalization now equals 40% of Chinese financial assets, a similar ratio to other markets
  • In 2007. China's market capitalization $4.48 trillion or 140% of GDP. Average trading volume $26b. Chinese companies raised $62b in domestic market IPOs (WB) Shanghai index rose over 80% in 2007, smaller Shenzhen rose 120% in 2007 as limited investments, tax policies, RMB appreciation, negative deposit rates fueled share price boom
p/s photo: Natalie Tong Sze Wing

1 comment:

Arn said...

http://research.stlouisfed.org/fred2/fredgraph?s[1][id]=AMBNS

Question: Sharp spike in money supply = impending hyper-inflation?