Looking for that ‘Two Sessions bump’ in the stock market? Best wait two weeks for the afterglow
No big policy changes expected as China’s legislature starts its annual meetings in Beijing this weekend
If you are an investor watching out for that stock market bump from China’s annual legislative meetings, history has some insights to offer.
Since 2000, when Jiang Zemin was China’s head of state and Zhu Rongji was the premier, the benchmark Shanghai Composite Index has fallen in eight out of the 18 years during the annual legislative meetings, which take place in Beijing, falling 0.7 per cent on average during the period.
Two weeks after the closing ceremony of the National People’s Congress, however, the index has risen in 12 out of the 18 years, gaining 1.9 per cent on average.
“Investors usually have high policy expectations from the Two Sessions, but when they realise that their expectations are not being met or exceeded, they sell and, therefore, contribute to the weakness in the market,” says Wang Chen, a partner at XuFunds Investment Management in Shanghai. “The weak performance is most likely to continue this year.”
Policies such as financial deleveraging will rein in innovation and put the financial market “under close scrutiny”, he said.
China’s bicameral legislature is expected to begin its annual meetings in the capital this weekend, in an annual ritual known as the “Two Sessions”. The Chinese People’s Political Consultative Conference, as the advisory body is called, begins meeting on Saturday, March 3, while the National People’s Congress, as the legislative body is called, begins meeting on Monday, March 5.
This year’s sessions mark the beginning of the second term of President Xi Jinping as head of state, and Li Keqiang as premier.
The meetings will also see the appointment of top jobs in the civil service overseeing the economy, industries, the central bank, regulators and planning bodies. The legislative bodies will discuss and pass laws, and approve annual growth targets for the country’s economy.
The Xi Administration is most likely to extend financial deleveraging, a major factor that weighs on China’s richly valued small-cap shares, through the year to ensure money is really supporting economic growth, according to Tai Hui, chief market strategist for Asia at JPMorgan Asset Management in Hong Kong.
“There will not be a big change of policies from 2017 and the government will continue its tightly neutral monetary policies and deleveraging,” he said. “In cases of tight liquidity, the central bank will fine-tune the policy to release liquidity and ease market concerns. But the general tone will be the same as before, to make sure money is serving the real economy rather than being used for financial speculation.”
Stocks linked to environmental protection
Poverty reduction, rejuvenation of rural areas and environmental protection are most likely to top the policy agenda during the sessions, according to Huangchuang Securities and Wanho Securities. Xi’s blueprint for turning China into a wealthy country seeks to lift its entire population out of poverty by 2020. There is more work for the government to do before this target can be met, as more than 30 million people lived under the poverty line in the second half of 2017.
Hengsheng Asset Management likes stocks linked to environmental protection, and believes the sector is likely to record a comeback this year after being in the doldrums in 2017.
“The issue of environment protection has now been elevated to the height of the constitution,” said Dai Ming, a fund manager at the Shanghai-based money manager. “There will be investment opportunities emerging from the sector as China still faces big pressures in the area.”
Shares in main players in the industry did not fare well last year as investors pulled out of smaller growth companies because of stretched valuations. Beijing Originwater Technology, a sewage treatment company, dropped by 0.9 per cent in 2017, and Yonker Environmental Protection fell by 9.1 per cent for the year.
Xi’s extended stay in power
This year’s legislative meetings are also expected to be under the spotlight because legislators will review a proposal by the Communist Party to abolish a constitutional provision that bars the president from serving more than two terms. The move is widely seen as the final clearance Xi needs to extend his stay in power.
Investors seem to approve of this news as Xi, 64, is seen as having successfully steered the economy and financial markets so far. China’s stock market has stabilised and volatility has dropped to record lows, thanks to the state-backed funds that were created after the 2015 crash.
Xi’s supply side reform of cutting excessive capacity in traditional industries has turned around companies in sectors from steelmaking to coal, helping to drive up shares of companies such as Baoshan Iron and Steel and China Shenhua Energy by more than 30 per cent over the past year.
“Xi appears to be steering the economy in the right direction,” said Andy Rothman, investment strategist at Matthews Asia. “The private sector generates all new jobs, income growth is strong, inflation is moderate and Xi has begun addressing the debt problem.”
While Xi’s attempt to seek a longer presidency might serve as a catalyst that will prop up equities, traders are also preparing to read between the lines as far as policies go, looking for clues that will possibly boost beaten down small-cap stocks.
As early as the end of last year, the country’s most reliable strategists, from Haitong Securities to Bocom International Holdings, had predicted that smaller companies would beat large-caps, also known as blue-chip stocks, in 2018, ending the crowded trading in big companies that started in 2016.
That call now seems to be prescient. The ChiNext gauge of growth companies jumped by 6.2 per cent this week, outperforming the Shanghai Composite by the most since 2016, as smaller companies traded close to the cheapest level against the broader market on a valuation basis.
Xi’s deleveraging campaign has spurred a rally in blue-chip stocks since 2016, prompting investors to stake their money in companies with low valuations and secure earnings outlooks, as relatively tight liquidity lowers the appetite for risky assets.
“Should good policies come from the Two Sessions, stocks will rise as that fosters pretty thematic investment opportunities,” said Wei Wei, a trader at Huaxi Securities in Shanghai.
Vincent Chan, head of China equity research at Credit Suisse, says China has only recorded one genuine “Two Sessions” rally in the past five years, in 2015. “On a longer horizon, the market moved when the government rolled out critical policy changes, like in 1993 and 1998. There are some similarities between now and 1993, when Zhu Rongji was appointed Executive Vice President, with sweeping reforms likely to take place in the financial system,” said Chan.
“The reforms will create long-term benefits, but also induce short-term pains. If the market surges because of anticipated major reforms and opening up, we advise investors to take profit – and vice versa.”