Japanese bank Nomura throws in the towel on its bearish China outlook
Analysts writing in an equity strategy note late last week conceded that they were wrong-footed on October 24 when they advised investors to pare back holdings of China-related stocks and raise cash ahead of the third plenum. At the time they said China stocks, up sharply from their June lows, would likely come under pressure as Beijing moved to rein in credit and housing. Political uncertainly was also a contributing factor behind the caution. Nomura’s views were in line with other Hong Kong brokerages downbeat about chances of major headway on economic reforms at the leadership conclave.
In revising its view to “neutral”, Nomura said it had grown tired of being on the wrong side of a rising market. It had also come around to the view that China stocks could keep rising for a while, and that there were new reasons for optimism. These included an improving economic outlook, data pointing to firming conditions, and liquid global markets. It also said reforms outlined at the third plenum offered a “positive structural catalyst” for stocks. As part of its strategy shift announced in the note, Nomura added China Union and Anton Oil to its model portfolio and reduced the portion of cash holdings to under 2 per cent from 10 per cent.
But there was another reason for turning more upbeat. Stocks in Hong Kong and Shanghai slumped to multi-month lows in June following signals by the People’s Bank of China that it would not intervene to stabilise the closely-watched Shanghai interbank offered rate known as Shibor. The rate, similar to the London interbank offered rate, or Libor, is an indicator of broader credit conditions. The rise in Shibor was seen as meaning that China was willing to tolerate tighter credit conditions even as the economy slowed – an outcome that spooked markets.
But it might have been more of a case of mishandled expectations, according to Nomura. The Japanese bank notes that Beijing has since treaded more carefully in the way it handles its communication. Both Premier Li Keqiang and President Xi Jinping have been careful to spend more time explaining the government’s macro economic policies since June. President Xi Jinping has been even been proactive in hosting question and answer sessions on economic reforms with mainland media.
The openness has a similar ring to the new policy of “forward guidance” adopted by the Bank of England and the Federal Reserve to help push down long-term interest rates and avoid unwanted surprises.
“Beijing appears to have learnt post the June Shibor incident, to anchor the capital market’s medium-term expectations,” Nomura said.
Nomura stopped short of advising investors to aggressively pile into stocks, saying its outlook on China was only “marginally” more positive than before. The bank continues to believe the stock market will remain capped as the economy slows and Beijing is forced to roll out austerity policies to ward off bubbles.
Still, Nomura’s capitulation echoes reversals in thinking by other China bears of late.
Meanwhile, other analysts have even been pointing to what looks like a campaign that will help put a tailwind behind China stocks. Beijing’s move to unwind its ban on new listings, after a year-long freeze, was viewed as encouraging by brokerages.
In addition, details of the Shanghai free trade zone, issued last week, were also welcomed. The 30-point guideline published on the People’s Bank of China website lays the groundwork for relaxed cross-border flows into securities and other investments, according to Hong Kong brokerage Reorient. The broker said the plan sketched out how mainland savings could be channelled into stocks in Hong Kong reminiscent of an earlier “through train” scheme that was scotched after initial talks.
Reorient called the new liberalisation a “major step” that may eventually amount to meaningful cross-border fund flows. If the trial goes well, expect local stocks to have a better ride next year.