Chinese A-shares may join global rout after Lunar new year holiday

With global stocks in bear market territory, analysts expect mainland markets will track the steep losses when trading resumes Monday

PUBLISHED : Sunday, 14 February, 2016, 5:00pm
UPDATED : Sunday, 14 February, 2016, 5:00pm

After global stocks were sold off sharply during the extended Chinese new year holiday, analysts expect A-shares could track the steep losses in external markets and fall sharply when mainland Chinese markets reopen at the start of the Year of Monkey.

“It’s concerning,” said Li Tao, an analyst for Citic Securities, “The external markets were quite volatile during the Chinese new year break, particularly in the US, where stocks continued falling. The depressed state of the global economy may have a negative impact on the A-shares market at the start of the Chinese new year.”

Global stocks have entered bear market territory, as the MSCI All-Country World Index has fallen more than 20 per cent as of Thursday from its most recent high in May 2015.

A-share markets were closed from February 8-12 for the Chinese New Year holiday and are scheduled to reopen on Monday.

“In Europe, stocks took a heavy beating due to losses in financial shares and bonds, and risks were spread out across broader financial markets. If the situation does not improve, a crisis could be in the making,” Li said.

However, he said it was less likely that Chinese banking shares would slump as much as their US and European counterparts because most listed Chinese banks are backed by the government.

“With the strong support of the Chinese central bank, it’s impossible that a similar critical situation could happen to the Chinese listed banks,” Li said.

Besides, banking shares currently have the lowest P/E ratio among blue-chip stocks in the Shanghai and Shenzhen markets, and they are also the favourite sector of state investment company Central Hujin and state margin lender China Securities Finance Corp, Li added.

“The plunge in US and European banking stocks could have a psychological impact [on Chinese counterparts], but the fall in Chinese banking shares will be limited,” he said.

Huarong Securities analysts are also cautious about the near-term trend of A-shares, saying that markets may continue testing their bottom after the Chinese new year holiday.

The markets will not stabilise in a real sense until there is an improvement in the fundamentals
Huarong Securities analysts

“The markets will not stabilise in a real sense until there is an improvement in the fundamentals or the government unveils supportive policies,” they said.

However, analysts suggested that some sectors could buck the weak trend and emerge as bright spots as investors turn risk-averse and flee to traditional safe-haven assets, with gold prices pushed to fresh highs.

“The recent strong advance in gold prices seems to signal a possible rebound in the non-ferrous metal sector,” analysts from Fortune Securities said in a recent research report.

The benchmark Shanghai Composite Index closed 0.6 per cent lower at 2,763.49 on February 5, the last day of the Year of the Goat, while the Shenzhen Composite Index ended down 1.2 per cent at 1,750.70. The gold sector bucked the trend and led the gainers with a more than 3 per cent rise.

Gold futures have jumped in international markets during the Chinese new year holiday. Last Thursday, April gold futures settled 4.5 per cent higher at US$1,247.80 per ounce, their highest close in one year.

In addition, analysts said Disney-related stocks in China may attract fund inflows after the Chinese new year holiday, as the long-awaited Shanghai Disneyland was set to start selling tickets in March and open for business in June.

“We favour stocks that could directly benefit from the opening of Shanghai Disneyland, including local transportation, tourism, retail and entertainment shares, as well as those manufacturers or suppliers authorised to work with Disney to sell related products,” analysts from Sinolink Securities wrote in a report.

The securities firm recommends stocks such as Spring Airlines, Shanghai International Airport, CTS International Logistics, Guangdong Alpha Animation and Culture, among others.