Across The Border | Shanghai’s blue chip rally shows no signs of fading
Large companies comprising the Shanghai Stock Exchange 50 Index are likely to continue outperforming smaller companies
So far this year, Chinese investors have been channelling funds towards dozens of large companies with solid earnings outlooks, as a liquidity squeeze triggered by government-led financial deleveraging prompted a sell-off in more risky sectors.
While the strategy of buying into the Shanghai exchange’s top 50 blue chips has paid off handsomely, investors now face a difficult question: whether to stick with it or head for the exit?
Even though the trade is looking long in the tooth by some measures, analysts say there are some good reasons why it will continue for the medium term.
Among them, a recently imposed rule designed to restrict substantial shareholders from a rapid unwind of their holdings in listed companies may actually help extend the rally in blue chips, in spite of its intention to boost demand for equities broadly.
“Liquidity is the key,’’ said Ken Chen, a strategist at KGI Securities. “It remains unknown when the deleveraging will come to an end and the tight liquidity situation will be reversed so investors still have nowhere to put their money but the large-caps for now.’’
Funding costs have been surging in China’s financial markets, with yields on 10-year government bonds rising to an almost two-year high and inter-bank lending costs even exceeding the benchmark lending rate, as regulators increase scrutiny of wealth management products and inter-bank lending activities to reduce financial leverage.