China stock market

UBS’ bold prediction: China’s large cap CSI 300 index to gain 26 per cent this year as worst is behind it

  • Valuation recovery may drive much of the gains in stocks in 2019, UBS strategist Gao Ting says
  • The price-to-earnings ratio of the CSI 300 Index is now 39 per cent lower than its historical average
PUBLISHED : Monday, 07 January, 2019, 3:38pm
UPDATED : Monday, 07 January, 2019, 3:38pm

China’s stocks may rise 26 per cent in 2019 as a recovery in equity valuation and earnings growth are poised to reverse the downward spiral in the world’s worst-performing market last year, according to UBS Group.

While growth in the world’s second-largest economy will probably continue to decelerate this year on weakening exports and consumption, stocks are likely to fare well as last year’s 25 per cent slump may have already been priced in, said Gao Ting, head of China strategy at the Swiss investment bank, at a conference in Shanghai on Monday.

Gao set a year-end target of 3,800 for the CSI 300 Index of the top 300 Chinese companies on the Shanghai and Shenzhen stock exchanges, which ended at 3,010.65 in 2018. He also predicted earnings will increase 5.4 per cent in 2019, slowing from a projected 8.5 per cent growth last year.

“Much of the gains this year will come from the valuation recovery and the current valuations already reflect a very pessimistic outlook of the economy,” he said. “Though earnings growth will slow, we still will have around 5 per cent growth rate.”

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Gao’s forecasts however have missed their mark previously. Last August he had set a 2018 year-end target of 3,800 for the CSI 300 Index and a similar earnings growth rate of 5 per cent.

The CSI 300 is now valued at 11.2 times earnings on a monthly basis, compared with its historical average of 18.3 times, according to data compiled by Bloomberg. A return to the average level for the multiple implies a 63 per cent gain on the index. Still, the current valuation is about 17 per cent more expensive than its record low of 9.6 times seen in 2014.

The index added 0.6 per cent to 3,054.30 in Monday trading, bringing its gain in 2019 to 1.5 per cent, after China’s central bank announced a one percentage point cut in the reserve requirement ratio after the market closed on Friday.

Gao said the market will constantly be swayed early in the year between concern about a slowdown in growth and expectations about policy shift tilting towards growth before it eventually moves up. He recommends buying energy and infrastructure stocks, and avoiding property developers and consumer companies.

China’s stocks were roiled by policymakers’ intensified crackdown on shadow banking and an escalating trade friction with the US last year. The sour sentiment spilled over to the Hong Kong market, sending the Hang Seng Index down by 14 per cent for the biggest annual decline in seven years.

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Wendy Liu, chief China strategist at UBS, said at the conference that Hong Kong’s stocks may trend lower in early 2019 before bouncing back, as investors need to digest many of the lower-than-expected earnings in the first and second quarter.

She predicted Macau gaming operators and cyclical companies including power producers may suffer from the big cuts in earnings estimates.