Strategists can’t agree on what’s in store for China stocks in 2019

Top investment strategists are deeply divided on the outlook for mainland stocks next year, as Chinese policymakers step up efforts to bolster economy, reversing the austerity that helped take the air out of asset prices this year.

UBS Group and Citic Securities are bullish on Chinese stocks based on an outlook that involves policy easing and appealing valuations. However, Bocom International Holdings and Shenwan Hongyuan Group argue that equities will remain under pressure throughout 2019.

The divided outlook underscores cautiousness among top strategists after almost all were inaccurate in forecasting Chinese stocks in 2018, having underestimated the impact of the US-China trade war and a deleveraging campaign by Beijing. Most forecasters agree that stocks will hit a bottom in 2019 after President Xi Jinping pledged “unwavering” support for private companies and Vice-Premier Liu He publicly talked up equities.

Still, there is little consensus over whether Chinese stocks will resume an upwards trajectory.

“The market will trough in 2019 with the help of policies, but will be hampered by the trade dispute,” said Hong Hao, a managing director at Bocom International Holdings in Hong Kong. “Historically, an A-share trough can be protracted for well over a year. As such, we shall temper our expectations regarding market returns next year.”

Hong was the most accurate in forecasting Chinese stocks this year among major investment banks. He predicted in December last year that the benchmark Shanghai Composite Index would move between 2,800 and 3,900 in 2018. The gauge has so far traded in a range from 2,449 to 3,587, and has never reclaimed 3,300 after breaching the level in March.

Trade war could weigh on China growth, investments in 2019

Hong forecasts the Shanghai Composite will trade in a range from 2,000 to 2,900 next year. That implies a maximum 12 per cent gain on the index from Friday’s closing price as well as a decline of up to 22 per cent in the following year, according to a model based on his earnings yield and bond yield model. It last closed at 2,579.48.

This year has been a rough ride for Chinese stocks, with the Shanghai Composite entering a bear market in June and having tumbled 22 per cent sine the start of the year. A liquidity strain has led to an array of corporate bond defaults and exposed many listed companies to the risk linked to shares pledged as collateral for loans.

Shenwan Hongyuan, a Shanghai-based brokerage, estimates profit growth for mainland-listed companies to further moderate to 7.9 per cent in 2019 from 12.5 per cent this year, because of worsening fundamentals for the macro economy.

Still, there are optimists. UBS said the CSI 300 Index will probably rise to 3,800 by the end of 2019, implying a 21 per cent gain from its Friday’s close, according to strategist Gao Ting. He believes policy easing and earnings growth will boost market confidence over time, without giving a target for the Shanghai Composite.

Citic Securities believes 2019 will be the starting point for a bull run that will last for three to five years, as the government focuses on the quality of economic growth by accelerating reforms of state-owned enterprises and opening up more industries to foreign investors. Stocks are likely to start to trend higher in the second quarter, propelled by a recovery in earnings, said Qin Peijng, a strategist from the Beijing-based brokerage. The broker did not give provide an index target.

In recent times, China’s domestic stock markets have showed resilience in the face of a severe slump in US equities, thanks to credit support policies recently unveiled by Beijing. The Shanghai Composite has rebounded 3.7 per cent since it reached a four-year low on October 18, while the Standard and Poor’s 500 Index has slid 4.3 per cent during the period.

Shenwan Hongyuan said the risk appetite among investors would still remain low in 2019 because economic fundamentals are likely to continue to weaken at a measured and limited pace.

“2019 is likely to be a year of bottom consolidation,” said Fu Jingtao, a strategist at the brokerage. “The declines may be smaller than 2018, and the market will have more structural opportunities.”