China’s A-share market fatigue has stock bulls praying for earnings salvation amid liquidity, valuation stress

Gains in aggregate stock indices mask the narrowing breadth of rally as winners are concentrated among only a few sector leaders

Record cash inflows into domestic mutual funds may sustain buying support for A-share market

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Investors are seen monitoring stock prices in a brokerage gallery in Shanghai in February 2019. The 78 per cent rise in the CSI 300 Index since 2018 leaves the market overstretched, BCA Research says. Photo: Xinhua

Published: 7:30am, 1 Feb 2021Updated: 8:13am, 1 Feb 2021

China has been a happy hunting ground for local and foreign stock investors as the A-share market clawed its way back from the painful 2015 crash. After rallying from a January 2019 low, however, valuations are frothy and stocks may be at risk of near-term capitulation, some analysts said.

Since the CSI 300 Index of the nation’s biggest stocks reclaimed the 2015 peak on January 5, the rally has plateaued and wobbled, with markets flashing several signs of fatigue, strategists at BCA Research led by Jing Sima wrote in a report on January 27.

Tightening monetary conditions, narrowing breadth of stock gains, earnings and valuation hurdles, as well as new stock offerings mania are some of the major telltale signs that also preceded past market tumults, she added. Investors looking to allocate more cash to Chinese stocks should wait until a correction occurs.

“The market is not very well prepared for tightening monetary policies,” said Min Liangchao, a strategist at HSBC Jintrust Fund Management in Shanghai. “It’s now pretty hard to make money simply through valuation expansion. Market pricing will be more driven by earnings and we should put more emphasis on it.”

The CSI 300 Index, which tracks the biggest companies in Shanghai and Shenzhen bourses, has risen 78 per cent from end-2018 to surpass the 2015 peak on January 5. The rally helped fuel China’s stock market capitalisation above the US$10 trillion mark in October.