Mainland China shares on track for gains in Year of the Rooster

Further gains could be in store for Shanghai’s Composite Index, following a 14.3 per cent advance in the Year of the Monkey

PUBLISHED : Friday, 03 February, 2017, 6:32am
UPDATED : Friday, 03 February, 2017, 7:13am

Mainland stock markets are poised for further gains in the Year of the Rooster, according to analysts who say the post-holiday resumption of trade on Friday will likely continue the upbeat tone that lifted stocks in the recently-ended Year of the Monkey.

The upbeat factors, they say, include a recent strengthening in the yuan and signs of a stabilising economy, but upside may be capped amid concerns of continued liquidity tightening.

The Shanghai Composite rose for a fifth straight day on January 26 to close the Year of the Monkey up 14.3 per cent at 3,159.17. The Shenzhen Component Index also snagged a 3.8 per cent gain for the year.

“I think the Shanghai Composite Index will consolidate the recent rally and possibly advance 1 to 2 per cent on the first day [of post-holiday trade],” said Ben Kwong, executive director of KGI Asia.

“The sentiment is generally upbeat, as the yuan has firmed amid a softening US dollar,” he said.

The US Federal Reserve on Wednesday decided to keep interest rates unchanged, as expected, at the conclusion of its first policy board meeting of 2017. The policy board did not indicate explicitly the timing of the next rate increase in its post-meeting statement.

Expectations were low for an imminent tightening, as markets priced the probability of a March rate rise at 18 per cent on Thursday, according to the FedWatch tool by CME Group.

“This means the greenback could stay weak in the short run,” said Kwong.

The yuan declined a combined 5.3 per cent against the US dollar in the Year of the Monkey.

Linus Yip, chief strategist for First Shanghai Securities, also projected mainland shares to continue their uptrend due to the yuan’s rebound and positive signs from the Chinese economy.

“The Shanghai Composite could test the level of 3,180 on Friday. If it can break the level, we may see an even greater momentum,” Yip said.

“PMI readings just showed to us the overall economy has stabilised,” he said.

China’s official manufacturing sector continued to expand in January, as the Purchasing Managers’ Index (PMI) reached 51.3 versus December’s 51.4, slightly better than market forecasts. The 50-level separates expansion from contraction.

“It’s a solid update to begin the year,” said Elliot Clarke, a senior economist for Westpac Institutional Bank. “Overall, these headline results support an expectation that aggregate growth will be maintained in 2017 at or near its 2016 pace of 6.7 per cent.”

However, analysts see some headwinds, which could pose downside risks to the stocks.

“Investors still have some caution, as there is a major concern— liquidity,” Yip said.

China’s domestic market suffered a cash squeeze before the Lunar New Year holiday, with the three-month Shanghai Interbank Offered Rate hitting a 20-month high of 3.8706 on last Thursday.

Rates traditionally spike before the Lunar New Year, as people take cash out of the bank for holiday spending and customary monetary gifts in red envelopes.

Although the People’s Bank of China provided a temporary liquidity boost to commercial lenders to ease the holiday credit squeeze, analysts expect 2017 to be a year with tightening monetary policy.

“We should keep in mind the most important policy this year will be deleveraging,” said Kwong.

On January 24, the PBOC unexpectedly raised interest rates for its medium-term lending facility, a move regarded as a signal of tightening.

In addition, US President Donald Trump’s potentially protectionist policy could also add to market uncertainty, Kwong added.

“In recent months, the PBOC has shifted its policy focus from promoting growth to reining in the highly leveraged financial sector. As a result, overall liquidity is likely to remain tight and local interest rates are likely to remain elevated at least through early this year,” said Luke Spajic, head of portfolio management in emerging Asia for PIMCO.