China stock market

Shanghai exchange says beaten-down stocks are worth buying after entering bear market

The exchange joins a list of government institutions to drum up support for mainland Chinese stock markets

PUBLISHED : Monday, 09 July, 2018, 12:26pm
UPDATED : Monday, 09 July, 2018, 11:04pm

China’s operator of its bigger bourse has given a rare assessment on the outlook of mainland stocks, saying that the nation’s equities are worth buying now.

In an article posted on its official microblog on Monday, the Shanghai Stock Exchange said equities were worth investing in now, on the back of lower valuations against major global peers, continuing corporate earnings growth and record values of share buy-backs from publicly-traded companies.

The Shanghai exchange is the latest government institution to drum up support for beaten-down mainland stocks to entice the nation’s 100 million investors after China’s markets officially entered the bear territory in June. China’s state-controlled state media including the Xinhua News Agency also ran a series of articles last week saying the ongoing equity declines were irrational and overdone.

“Current stock prices are diverging from the fundamentals of listed companies,” said the exchange in the article. “On the whole, the valuations of the broader market and big-cap blue-chips are at a reasonably lower level among major economies. The investment value has emerged [as the stock market decline] released risks.”

The benchmark Shanghai Composite Index jumped 2.5 per cent to 2,815.11 on Monday, the biggest single-day gain since May 2016. Still, it has fallen 21 per cent from a January high as the US-China trade war continues and the deleveraging to rein in shadow banking denting economic growth dampen investor interests.

The gauge for 1,470 companies on the Shanghai exchange was valued at 13.1 times earnings as of Friday, almost matching the lowest level touched in the aftermath of a 2015 rout that erased US$5 trillion in market value, the bourse said in the article. The median price-to-earnings ratio was 28.2 times, on par with the level preceding the last bull market in 2014, it said.

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The exchange also said the number of publicly traded companies whose share prices have dropped below book values rose to the highest since 2009, with 162 companies falling into the category to date.

Increased share buy-backs by large shareholders and listed companies were also a sign that stocks already hold long-term investment values, the bourse said. By the end of last week, mainland-traded companies had proposed 103 buy-back plans worth 36 billion yuan (US$5.43 billion), an amount that exceeded the annual volume for any one year in history, according to Guosen Securities.