China stock market

Mainland stock declines expected to end in 2018, with more small caps tipped to enter the fray

Leading analyst at Shenwan Hongyuan suggests ‘pessimistic expectations have been overblown’ for the 2018 stock market

PUBLISHED : Monday, 11 December, 2017, 5:52pm
UPDATED : Monday, 11 December, 2017, 10:36pm

The turbulence on China’s stocks may be ending soon as investors remain concerned about financial deleveraging, and 2018 will probably see a new round of run-up, with smaller growth firms joining the rally, according to the nation’s two most accurate brokerages.

The Shanghai Composite Index is likely to arrest a sell-off triggered by increased government efforts to remove excessive liquidity from financial markets after the benchmark fell 4.6 per cent from this year’s high through last week, said analysts led by Fu Jingtao at Shenwan Hongyuan Group.

An uptick in corporate earnings will continue next year and small-cap valuations have dropped to reasonable levels, supporting the uptrend that followed the stock crash in 2015, according to Haitong Securities.

Haitong Securities and Shenwan were ranked in the top two places by New Fortune magazine this year for Chinese equity strategy research.

The argument that financial deleveraging, which culminated last month in the unveiling of general rules aimed at putting the US$15 trillion asset-management industry under more surveillance, will lead to more systemic risks does not hold water as it contradicts with policymakers’ paramount goal of maintaining financial stability, according to Shenwan.

“Pessimistic expectations have been overblown,” said Shenwan’s Fu. “The market seems to have forgotten the bottom line is to prevent systemic risk.”

Fu reckons the market is likely to find its bottom soon, as institutional investors have already cut their holdings to low enough levels with foreign players now preparing for 2018 allocations after selling to lock-in profits, he said.

The Shanghai Composite rebounded 1 per cent to 3,322.20 at the close on Monday, adding to an annual gain of 7 per cent for the year so far.

Most of the year’s gains come from large-caps as investors sought out companies with low valuations and secure earnings outlooks on the back of the 2015 rout.

Haitong Securities estimates an inflow of 330 billion yuan (US$49.9 billion) into Chinese equities next year, compared with 22.3 billion yuan in 2017, while market volatility will remain tepid with the participation of more institutional investors.

Leading growth companies like those engaged in high-end manufacturing and emerging consumption industries are expected to stand out as additional market darlings next year, said Xun Yugen, a strategist at Haiong Securities.

Meanwhile, investors will continue to pay premiums to leading blue-chip stocks as these firms conduct more industry consolidation and accelerate internalisation, he said.

All mainland-listed companies are expected to post a 13.5 per cent profit increase in 2018, Xun said.