This is why Chinese stocks are expected to rise for now
As Chinese equities notched up their first fund inflows in three months, the A-shares market is expected to see an uptrend with improved risk sentiment in the coming quarter. In the short term, sectors such as property and IT may deserve more investor attention while cyclical sectors like coal and iron ore could face correction risks, analysts say.
The market outlook appears to have improved recently as the benchmark Shanghai Composite Index has risen in 10 of the past 12 sessions as of Wednesday, registering solid gains of nearly 7 per cent this month.
The recovery has boosted risk appetite, with the China and Hong Kong equity markets reporting a net inflow of US$170 million (excluding local funds) for the week ending March 9, the first weekly inflow in 14 weeks, according to data from China International Capital Corporation (CICC). During the same period, A-share exchange-traded funds (ETFs) listed overseas attracted US$9.5 million.
Since June, global investors have pulled US$24.8 billion out of China and Hong Kong equity markets as an A-share market bubble burst last summer, according to CICC data.
Analysts said equity markets may continue to recover, with increased capital inflows in the coming quarter as policymakers have shown strong determination to shore up economic growth with a series of expansionary fiscal and monetary policies. Consequently, worries over a sharp depreciation of the yuan and a hard landing of the economy have eased.
Also, some speculative investment may be diverted from properties to equities, after signs of overheating in the housing markets in some large cities and increasing risks of regulatory tightening.
“We think the monetary stance remains accommodative as indicated in the policy tone outlined by People’s Bank of China (PBOC) governor Zhou and the raised M2 target of 13 per cent (during the National People’s Congress meeting),” Deutsche Bank said in a research note.
“We notice that the reduced new loans and TSF (total social financing) in Feb are mainly about falling household loans, discount bills and FX loans, while corporate loans remain strong. Moreover, despite a sequential fall from the abnormally higher January reads, February credit growth is still accelerating from last December.”
The regulators have also expressed determination to stabilise the market when necessary, said Ting Gao, a strategist at UBS.
Liu Shiyu, the new chairman of the China Securities Regulatory Commission (CSRC) recently said in his first formal speech that a registration-based initial public offering system can only work in a multi-layered capital market and optimised the legal environment, suggesting it may be a while before the system is introduced.
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On Wednesday, Premier Li Keqiang said at a press conference that the authorities would strive to launch the Shenzhen-Hong Kong Stock Connect this year.
“We believe the registration-based A-share IPO system will not be launched in a rush, while the SZ-HK Stock Connect is still likely to be launched this year,” UBS analysts noted in a research report.
CSRC chairman Liu has also suggested there would be no exit for the market stabilisation fund anytime soon and that the government would continue to support the market when necessary.
“We think these should help improve market sentiment, and the delay of a registration-based IPO system may boost small-caps in the short term,” UBS said.
On the currency front, market expectations for continued yuan depreciation have decreased as the exchange rate has “basically stabilised”, Gao said.
The PBOC’s net foreign exchange sales dropped sharply to 227.9 billion yuan in February from 644.5 billion yuan in January, suggesting the central bank has spent less to intervene in the currency market and support the yuan as capital outflows have slowed.
On Wednesday night, the US Federal Reserve decided to keep interest rates unchanged and lowered its estimated number of rate increases to two this year, from the earlier four, due to the weak global growth outlook and market volatility.
“The Fed decision will come as a respite to global asset prices,” said Yao Liqi, an analyst at Shenwan Hongyuan Securities, adding that fears have eased over a surging US dollar and increased capital outflows from the emerging markets.
Gao also said the stabilising exchange rate, a recovery in external markets, and “not too bad” economic data during the first two months of the year will boost the stock market in the coming months.
“An uptrend (for A-shares) in the coming quarter is a high-probability event,” he said, adding that he expects the Shanghai Composite Index to rise about 10 per cent during the period.
Deutsche Bank also expects “further market upside” in the first half of 2016. Among the sectors to watch, the German investment bank favours property, financials and IT, as those industries have outperformed in previous market rebounds since 2009.
UBS also recommends property stocks in the short term as they may benefit from the government’s policy to clear stockpiles of unsold homes.
“We believe the positive tone from regulators (on the destocking policy) will support strong property sales in tier-2 cities,” UBS said.
However, the Swiss firm advised investors to stay away from commercial banks due to concerns over non-performing loans, and cyclical sectors such as coal and iron ore, which may also face corrections as the economy remains sluggish.