China markets likely capped in tight range until year end, analysts say

Markets likely to remain unresponsive until China unveils more aggressive stimulus, which might not come until next year, analysts say

PUBLISHED : Thursday, 29 October, 2015, 2:31pm
UPDATED : Thursday, 29 October, 2015, 4:45pm

China’s latest round of policy easing isn’t likely going to be enough to push stocks higher before year end, according to analysts who cited structural economic headwinds along with signs that the US Fed may be prepared to tighten policy at its December meeting.

Last weekend’s policy easing, which amounted to the sixth interest rate cut unveiled by the People’s Bank of China in a year, was seen by some analysts as helping to insulate mainland stocks from further declines, but short of the policy extremism needed to push prices meaningfully higher.

Hong Hao, chief strategist with Bocom International, said he could not see any significant growth prospects for the A-share market this year.

“We have too much money, but too few investable projects. And slowing but not collapsing growth does not justify quantitative easing from China, as many have been chanting.”

Hong said authorities in Beijing were likely to hold back on big stimulus moves for the time being.

“I do not think the central government is likely to roll out any aggressive policies until next year, simply because there is no need, the PBOC has already pumped ample liquidity to the market, and there is no sign for a hard landing,” he said.

Hong forecast a medium term upper boundary for the Shanghai Composite Index of 3,500, and advised investors to stick with short term trading.

Jason Song, chief strategist with Guotai Junan International said investors were wary about the outlook for asset prices, even as they have already factored in the likelihood of a soon-to-begin rate tightening cycle by the Federal Reserve.

“It seems investors’ sentiments on the Asia markets are weak and people are ready to pull out their money once there are clear negative signals.”

Another issue is valuation. Stocks on the Shanghai Composite Index are trading at a price-earnings multiple of 14.47 times, compared to the Shenzhen Composite Index at a multiple of 39.67, or the Nasdaq-style ChiNext, which trades at 75.87 times.

“New liquidity can only impact the market through multiple expansions, instead of earnings growth. Yet with valuations already so high, we doubt it could rise significantly further from here, unless we could have two bubbles in the same asset consecutively in six months,” Hong said.

Stock markets in Shanghai and Shenzhen posted small gains on Monday and Tuesday after the PBOC’s announcement. The momentum failed to hold through Wednesday’s session, which saw the Shanghai Composite shedding 1.72 per cent to 3,375.20, and the Shenzhen Composite dropping 2.22 per cent to 1,998.38.

After a two-day meeting ended Wednesday, the US Federal Reserve kept interest rates unchanged and in a direct reference to its next policy meeting, putting a December rate hike firmly in play. The central bank also downplayed recent global financial market turmoil and said the US labor market was still improving despite a slower pace of job growth.

In late afternoon trading Thursday, the Hang Seng Index was down 0.6 per cent, or 137 points to 22,820. The Nikkei 225 added 0.17 per cent to 18,935.71 in Japan ahead of the central bank’s meeting. the S&P/ASX 200 Index lost 1.28 per cent to 5,266.86 in Australia.

The Shanghai Composite was up 0.4%, or 12 point higher, at 3,387.

Still, margin finance balance, an indicator tracking people’s buying of stocks with borrowed money, shows that the mood has swung back towards embracing risk.

Margin financing for Shanghai and Shenzhen has risen in each of the past weeks, reaching 1.01 trillion yuan as of last Friday,

In May the combined margin finance balance topped 2 trillion yuan, signalling excessive bullishness. In the weeks that followed, a sharp correction that knocked 30% off the major indices.

Hong said improved sentiments may lead to some further gains for stocks, but cautioned it was not a confidence-inspiring uptrend.

Brett McGonegal, the chief executive of Reorient, forecasts the Shanghai Compostie will trade above the 4,000 level by the end of this year. He flagged healthcare and technology as sectors with the biggest upside.

“You don’t push for reform if the economy is that bad. And if your onshore business is bad you stop doing offshore merge and acquisitions,” he said.

He noted China’s efforts to support its domestic companies in an international push to create “national heros”. He cited the Uber-like ride-haling app Didi Kuaidi as an example. The company, backed by e-commerce giant Alibaba and Tencent, had invested in peers including Ola, India’s largest ride-hailing app, Singapore-based GrabTaxi, as well as US based Lyft’s in the past few months.