Be wary of China markets, as were likely in the eye of the storm, rather than the season to bargain hunt, analysts say

Shanghai Composite gains 0.5 per cent last week

PUBLISHED : Monday, 25 January, 2016, 8:01am
UPDATED : Monday, 25 January, 2016, 8:00am

China’s equity markets have stabilised after weeks of selling, but it may be best to stay on the sidelines rather than pile in for bargain hunting as the turbulence affecting global markets could resume at any time, analysts say.

The Shanghai Composite Index gained 0.54 per cent last week, to end at 2,916.56 on Friday. The benchmark has dropped by about 700 points in the previous two weeks, and now sits well below 3,539.18, its closing level at the end of 2015.

On the other hand, offshore yuan strengthened for a second week. The People’s Bank of China on January 12 used a shock and awe approach to push up the yuan’s lending cost in Hong Kong. These included the introduction of tightening measures to drain offshore liquidity and curb capital outflow.

“Although the rest of the world is still in panic about China’s slowdown and volatility, China itself seems temporarily calmed. However, the falling oil price, geopolitical tensions, and the prospect of further rate hikes from the US still weigh on the global market and can spill over to China,” said Adam Xu, a mutual fund manager based in Shanghai.

Xu said his strategy was “to stay as prudent as I can by holding a low position in equities”.

Xu said his fund remained overweight on sectors that include coal mining, high-speed rail, and infrastructure, as the government seems ready to step up fiscal spending for economic stimulus, while supply-side reforms begin to take effect, benefitting some strong competitors in the manufacturing industry.

Bank of America Merrill Lynch is even more bearish, and recommended investors to be ultra-defensive.

The bank forecast the Shanghai Composite to trade in a range between 2,200 to 4,000, and end at around 2,600 by year end. The Hang Seng China Enterprise Index in Hong Kong, tracking mainland based companies, would likely trade in a range between 7,400 to 12,800, the investment bank said.

“Our top overweight sectors are telecommunications, power, staples, healthcare, and infrastructure operators; our top underweight sectors are financials, property and resources,” it said in a note issued Friday.

State-led interventions in the mainland equity and currency markets have prevented market prices from adjusting to reflect China’s deteriorating fundamentals, and resulted in increased volatility in Hong Kong assets, said Hong Hao, chief strategist with Bocom International. He advised investors to “sit tight for a little longer”.

On Friday, the Hang Seng Index surged 2.90 per cent, or 538.36 point to 19,080.51. In spite of the gains, the index finished in the red for the week, giving up 2.26 per cent, marking a fourth consecutive weekly loss.

Meanwhile, the Hong Kong dollar extended its downbeat performance for a third week. The downtrend abated on Thursday however, lifted by large buy orders at 7.8294, its lowest in eight and a half years.

Analysts said there might buying opportunities for mainland shares in March.

Historical data shows Chinese equity markets tend to advance ahead of the “two sessions”, which refers to the annual gathering of the nation’s legislators and political advisors in Beijing every March.

During the past 16 years, the benchmark Shanghai Composite Index rallied in 14 of them before the two sessions, the Shanghai Securities Journal said on Friday. The biggest rally came in March 2000, when the Shanghai Composite gained 13.23 per cent, while the Shenzhen Component Index rose 13.56 per cent.