China stocks downgraded by BCA Research on ‘non-trivial’ risk of policy overtightening

Name: Chinese premier addresses Hong Kong electoral changes, US-China relations, as ‘two sessions’ closes
Uploaded: 2021-03-18T06:02:14.000Z
Duration: 5 min 13 s
Description: Chinese premier addresses Hong Kong electoral changes, US-China relations, as ‘two sessions’ closes

Stocks lowered to underweight relative to global benchmarks within an equity portfolio on tactical and cyclical positions, after January’s cut to neutral

‘A tug of war between policy tightening and growth support is likely to persist throughout this year’: BCA analysts

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Chinese stocks get thumb down on tactical and cyclical views over the next 12 months on policy risks.

Zhang Shidong

Published: 2:02pm, 18 Mar 2021Updated: 2:19pm, 18 Mar 2021

China’s stocks have been downgraded on a one-year outlook by analysts at Montreal, Canada-based firm BCA Research, who cited “high risk” policy overtightening and weakening technical indicators as their reasons, as the government pulls back policy support this year.

The firm cut its tactical (zero to three months) and cyclical (six to 12 months) positions to underweight relative to global benchmarks in a report. The move follows after a cut in recommendation to neutral on January 13, citing valuations and policy miscalculation risks amid tighter industry regulations.

“The downside risks to China’s cyclical growth trajectory are non-trivial”, potentially threatening the economy and corporate profits, analysts led by Jing Sima wrote in a March 17 report to clients. “A tug of war between policy tightening and growth support is likely to persist throughout this year.”

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Chinese premier addresses Hong Kong electoral changes, US-China relations, as ‘two sessions’ closes

The underweight position reflects BCA Research’s negative short-term view on three benchmarks, namely the MSCI China Index and MSCI China A Onshore Index, and the HSCI Hong Kong Index.

The China Index had 698 members with a market value of US$3.2 trillion at the end of February, while the Hong Kong gauge had 38 members with US$548 billion in capitalisation. Both covered about 85 per cent of their respective universes, based on some yardsticks.

Since the January 13 call, the Shanghai Composite Index has dropped 3.7 per cent, wiping US$610 billion in market value of Chinese onshore stocks. Measures to rein in industries, such as fintech giants and property developers, have burnt investors chasing outsize gains.

While China’s budget and key economic initiatives unveiled at the “two sessions” last week suggest policy tightening will be gradual in 2021, BCA Research advised against complacency, given recent data and statements.

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