China bulls may return if rally of brokerage stocks is any indication
- Chinese brokerages are among the best-performing sector in 2019, with a gauge tracking securities firms rising 37 per cent since October
- Expectations about loosening market scrutiny and the tech board, coupled with beaten-down valuation, spur a rally
For those are anticipating a good run in mainland Chinese shares this year, the ride on brokerage stocks is an encouraging sign.
A Bloomberg gauge of the 23 mainland-listed brokerages has rallied 37 per cent since a low in October, and four out of the 10 best performers on the CSI 300 Index so far this year are securities firms. The run-up on the sector, typically a leading indicator of market sentiments, could foreshadow the recovery of China’s stocks from their world-beating decline last year.
Traders’ optimism about brokerage stocks has stemmed from the diffusion of risks involving listed companies’ pledged shares, President Xi Jinping’s ambition to set up a technology board in Shanghai and the securities regulator’s remarks to boost market liquidity.
Before that, these stocks were among the most shunned last year, with the average share prices once trading at a discount to the book values.
“The fundamentals of the brokerage sector have improved significantly and lots of people are looking at an inflection point of the sector,” said Wu Kan, an investment manager at Soochow Securities in Shanghai.
“There are rising expectations that trading will get more active this year and brokerages stand to benefit from that.”
The bet on the brokerage sector was reinforced after vice-chairman of the China Securities Regulatory Commission Fang Xinghai said at a weekend forum that the regulator would start the tech board and a registration system for initial public offerings that gauges demand more on the market force “as soon as possible”.
He also said the measures were aimed at reviving trading activity in the market.
The fundamentals of the brokerage sector have improved significantly and lots of people are looking at an inflection point of the sector
The average daily trading value on the Shanghai and Shenzhen stocks dropped by 19 per cent from a year earlier in 2018, according to data compiled by Bloomberg.
The Bloomberg gauge of Chinese brokerages slumped 31 per cent in 2018, trailing a 25 per cent drop on the benchmark Shanghai Composite Index, as revenues from stock broking and investment banking businesses shrank after the regulator ramped up oversight of stock trading and shelve a plan to allow overseas-listed Chinese companies to float depositary receipts. It was the fourth consecutive annual loss for Chinese brokerages since a bubble on the stock market burst in 2015.
Total revenue of the 34 listed brokerages fell about 14 per cent to 165.4 billion yuan (US$24.5 billion), the China Securities Journal reported on Tuesday.
The multiple dropped to a record low of 0.96 times in October before the financial regulator and local governments introduced joint measures to prevent bad loans from ballooning at brokerages that had been exposed to the share pledge risk.
Among the sector’s best performers this year, CSC Financial has jumped 38 per cent, Founder Securities 29 per cent and Southwest Securities 20 per cent.
Investors including Jingxi Investment Management said the brokerages’ current share prices may have already factored in the optimistic expectations, and whether the run would carry on hinges on earnings.
“The rally is mostly driven by expectations and now you need concrete earnings to back up the logic,” said Jingxi’s chief investment officer Wang Zheng.
“But any good showing of brokerage shares often indicates that the broader market won’t be too bad going forward.”
