Better days seen ahead for Hong Kong and China stocks

PUBLISHED : Wednesday, 16 March, 2016, 5:54pm
UPDATED : Wednesday, 16 March, 2016, 8:37pm

Chinese stocks are expected to rebound in the second quarter of this year but will not enter a bull market, says UBS.

“The Shanghai composite index will climb 10 per cent in the following quarter,” said Gao Ting, head of China strategies at UBS Securities. “The expected gains will mainly come from a correction as Chinese stocks saw severe investor overreaction in the first quarter.”

The Shanghai Composite Index started 2016 losing over a fifth of its value in three weeks.

“Diminishing concerns about the Chinese currency and an economic hard landing will drive the stock markets up,” said Gao. “The Chinese yuan has been basically stable and overseas markets are recovering.”

The stock market has gained momentum since Liu Shiyu, chairman of the China Securities Regulatory Commission, said it is too early for the state rescue team leaving the market. A new registration-based system for initial public offering, which was expected to facilitate listing and soak up funds from the secondary market, also looks unlikely anytime soon.

“Mid- and large-cap growth stocks are our top picks in the China market,” said Gao.

Property and technology sectors are expected to perform well in China, so are the upstream and downstream businesses related to property such as household appliances and furniture industries, said Gao. Small-cap stocks will face big risks owing to high valuations, he added.

“However, investor confidence is fragile and China stocks are still very volatile,” Gao warned. “The expected 10 per cent rebound will not be a one-step recovery.”

He attributed the recent outperformance of cyclical stocks in the China market to the anticipation of an increase in demand but said specific evidence of greater demand is yet to be seen. This is why, he said, stocks of coal, steel and cement companies will only see periodic jumps. “If the demand recovery proves to be false, the related stocks rebound will come to an end,” Gao stressed.

“It’s hard to say if China stocks are in bubble territory but the overall valuation of A-shares is very high,” Gao said. But he added he still expects CSI 300 index to rise 20 per cent by the end of the year.

UBS H-share strategist Lu Wenjie said he also expects a continued uptrend for Hong Kong stocks in the near future but within a limited range, with no hopes of a bull market.

Lu expects Hong Kong mid- and small-cap stocks to emerge as darlings of mainland Chinese investors, especially when the Shenzhen-Hong Kong Stock Connect gets going this year. “Life insurance, property and railway construction industries are appealing for us,” he said.

Mid- and small-cap stocks in IT and consumer sectors are expected to perform best in Hong Kong as these are “new economy” companies and have low valuations, said Lu, adding that the market can gain steam when the Hong Kong-Shenzhen connect takes off this year.