More declines ahead for China’s stock market, according to money managers at HSBC, UBS and Citic
- Slowdown in economy and earnings as well as turmoil in global markets to hold back stocks, say HSBC Jintrust Fund Management and UBS
- Rebound falters on Wednesday, with equities trimming gains
Policymakers in mainland China will need to do more to convince top money managers and strategists that a world-beating slump in the country’s stock market is over.
The benchmark Shanghai Composite Index has rebounded by 4.7 per cent after falling to a four-year low last week, but HSBC Jintrust Fund Management forecast that Chinese stocks will witness consolidation in the best case scenario, and that an immediate turnaround in declines was unlikely.
“The revival of market confidence isn’t going to happen overnight and the market may still carry risks in the short term,” said Shi Xingtao, a fund manager at Shanghai-based HSBC Jintrust Fund Management. “China’s economy is still in a downward cycle and the Chinese market can’t be shielded from the global turbulence that has just started.”
Shi’s fund has trounced 96 per cent of its rivals over the past three years, according to Bloomberg data, and he said he would wade through beaten down small caps as part of his stock picking strategy, without naming any specific stocks.
The asset management unit of HSBC Holdings and the investment banking arm of Bank of Communications have also said Chinese equities were still exposed to turmoil in global markets; Citic Securities, China’s biggest listed brokerage, and UBS Group have said slowing growth in earnings and the economy will continue to drag down stocks.
Hit by the US-China trade war, Beijing’s financial deleveraging campaign and the recent risks associated with shares used as collateral for loans by small companies, China’s stock market has dropped to levels last reported following a crash in 2015 that wiped US$5 trillion in market values. This year, it also entered bear market territory, and was replaced by Japan as the world’s second-largest stock market.
Externally, Chinese stocks continue to be weighed down by increases in interest rates implemented by the US Federal Reserve, which have contributed to capital outflows from other developed and developing economies.
Vice-Premier Liu He led a coordinated effort on Friday last week along with China’s central bank, the People’s Bank of China, and top financial regulators to prevent stocks from dropping further. Smaller companies caught in a liquidity squeeze were promised better access to funds.
But investors have become skittish – the Shanghai Composite Index rose by 0.3 per cent to 2,603.30 on Wednesday, paring a gain of as much as 1.8 per cent. The index declined by 2.3 per cent on Tuesday after a two-day, 6.8 per cent jump.
And Gao Ting, a strategist at UBS in Shanghai, said investors will eventually brush aside the stimulus policies and focus on third-quarter earnings and economic fundamentals. “The medium to long-term performance still depends mainly on economic and corporate fundamentals,” he said. “Looking ahead, there is still a lot of uncertainty at the macro level.”
The downside pressure on China’s economy and corporate earnings is building up. Economic expansion slowed to 6.5 per cent in the third quarter, the lowest in almost a decade, while earnings growth at key mainland-listed companies could slow down to 13.1 per cent for the first three quarters from 14 per cent for the first half, according to a forecast by China International Capital Corporation.
Of course, there are others who believe China’s stocks have already bottomed out. JPMorgan Asset Management is one of them, and according to Zhu Chaoping, a strategist at the money manager, the unveiling of items that will be exempt from taxable incomes over the weekend showcases the government’s determination to further reform the economy, thus raising the appetite for risky assets.
The deduction of family expenditure on elderly nursing care, children’s education and mortgage loans from taxable income will lower income tax by 100 billion yuan (US$14.4 billion), according to a UBS forecast.
“The stock indices may have bottomed out at the current stage,” said Zhu. “But future market performance will be determined to a great extent by the pace of further fiscal reforms.”
A recent rally has recouped some of the losses on the Shanghai Composite Index. But the gauge remains down by 21 per cent this year, making it the worst performer among the world’s major markets.
And for Hong Hao, managing director at Bocom International Holding, who correctly predicted a crash in Chinese stocks in 2015, the downward spiral has more room to run.
“It’s difficult to say where the bottom is,” he said. “Fourth-quarter growth will continue to decelerate and market volatility will be a drag.”