China’s unloved stocks 2 per cent away from bearish trap as Fed policy, bubble worries spur flight to safety
- Trading volume in Shanghai and Shenzhen shrank on March 17 to the lowest level this year, showing cooling enthusiasm among investors
- Technical indicators are worrisome too, as indices approach bear-market tipping point, or have breached those markers
As caution prevailed, local investors have turned to the safest stocks for cover. Since the CSI 300 Index peaked on February 10 and slipped in the following five weeks, utilities and energy producers were the only winners among the industry sectors. Popular bets in health care, consumer staples and tech suffered the biggest losses.
“Being defensive is the best strategy for now,” said Li Lifeng, a strategist at Huaxi Securities. “The market may stage a short-term rebound, but I still do not see that it will be in for an upward trend again.”
That is not too assuring as indices tracking Chinese cheap and expensive stocks are highly correlated to the US bond market over the past five years, according to Lin Sishan, an analyst at Central China Securities.
“When yields on longer-dated notes surge, market expectations will intensify that the Fed will tighten policy to rein in inflation,” Lin added. “That will lead to narrowing interest-rate spreads, spurring an outflow of foreign funds, and pressuring high-valuation stocks.”
Other signs are also worrisome.
Failure to hold above that support may spell an end of the current uptrend that began from the depth of Covid-19 pandemic in March last year.
“The recent price correction in Chinese stocks has not yet run its course,” analysts led by Jing Sima at BCA Research wrote in a report to clients on March 17. “Moreover, equity prices in both onshore and offshore markets are breaching their technical resistance.”
Morgan Stanley and Credit Suisse had earlier this year also lowered their opinion on China’s stock market, according to media reports.
Not all is lost, though. For market optimists, the forthcoming earnings season may induce some relief rally. The 300 companies in the CSI 300 Index will probably report a 33 per cent jump in profit in the March quarter, compared with a 24 per cent decline a year earlier, according to Bloomberg data.
“Domestic economic fundamentals can be expected to become the deciding factor,” said Lin at Central China Securities.
“The risk-free interest rate in the US still has upside room to run on the backdrop of the fiscal stimulus and massive vaccination,” said Yang Lingxiu, an analyst at Citic Securities, China’s biggest publicly traded brokerage. “That’ll lead to further downside on US stocks in the short term.”