Downbeat UBS warns mainland stocks to slow Q4, in line with economy and as surveillance of financial markets tightens

On the positive, the Swiss bank tips companies with solid fundamentals such as financials, and food and drink firms, to outperform over the rest of the year

PUBLISHED : Friday, 20 October, 2017, 2:30pm
UPDATED : Friday, 20 October, 2017, 2:30pm

Swiss banking group UBS has warned Chinese stocks may hit the buffers in the fourth quarter as growth in the world’s second-largest economy slows and regulators tighten their scrutiny of financial markets.

It added that the A-share market could be set for consolidation after major benchmarks of big-cap shares climbed at least 18 per cent this year.

Gao Ting, the bank’s Shanghai-based head of China strategy, also cautioned that investors have been are too optimistic about Hong Kong-listed Chinese property shares – the leading gainers on the Hang Seng Index over the past year – and that they now risk falling amid weaker home sales.

China’s economic expansion decelerated to 6.8 per cent in the third quarter from 6.9 per cent from the previous three-month period, and housing sales also weakened after policymakers imposed buying restrictions in major cities to rein in red-hot prices.

At two separate briefings of the ongoing party congress in Beijing on Thursday, central bank governor Zhou Xiaochuan stressed the importance of maintaining stability of the financial system, and chief of the banking regulator Guo Shuqing promised financial supervision will get tougher.

The two factors “will hold back the performance of the broader market”, UBS’ Gao added.

“Most likely, there will be more “range-bound” trading – a strategy that identifies stocks trading in channels, with traders buys shares at the lower level of support and selling them near the top of the channel.

He said companies with solid fundamentals such as financial, and food and drink stocks will probably outperform in the fourth quarter.

The CSI 300 Index tracking the 300 biggest companies on the Shanghai and Shenzhen exchanges has fallen 0.5 per cent from a two-year high registered on Wednesday.

The gauge has climbed 18 per cent in 2017, while the SSE 50 Index, a separate big-cap stock measure, has steamed ahead 20 per cent.

UBS estimates China’s growth to further slow to 6.6 per cent this quarter, and 6.4 per cent for 2018, with the central bank unlikely to loosen monetary policies against the backdrop of ongoing deleveraging, according to Wang Tao, the bank’s head of China economic research.

Property sales will probably decline as much as 2 per cent next year, she added.

According to the statistics bureau, home sales increased 10.3 per cent from a year ago in the first nine month of the year.

Gao said the outlook for Chinese developers trading in Hong Kong would darken, saying the sector’s performance is closely in tandem with housing sales data historically.

“They will be under some pressure,” he said. “Their rally is to an extent a catch-up after valuations were beaten to extremely low levels.”

A Bloomberg index of 22 Hong Kong-listed Chinese developers has jumped 96 per cent over the past year, with Sunac China and China Evergrande Group surging more than 400 per cent.

The gauge is now valued at 8.6 times reported earnings, recovering from a low of 4.1 times reached in 2014, according to Bloomberg data.