China stock market

Shanghai’s index of 50 biggest companies gets ‘thumbs up’ from analysts after tumbling 2.6 pc this past week

The SSE 50 Index, which suffered its biggest week pull back this year, deserves a closer look for investors seeking companies with stable earnings, as analysts expect the uptrend to resume

PUBLISHED : Friday, 16 June, 2017, 5:29pm
UPDATED : Friday, 16 June, 2017, 7:15pm

The pullback in Shanghai’s largest listed companies this week offers a potentially good buying opportunity for new investors, or those looking to top up their holdings, according to analysts who say things continue to bode well for what’s been what’s been one of the year’s best performing investment themes.

Factors supporting Shanghai’s most valuable companies, ranging from low valuation to a liquidity squeeze in the financial markets that’s pushing investors towards safer havens, remains intact, according to Wu Kan, a fund manager at Shanshan Finance in Shanghai.

“It looks like a short-term technical correction after the decent run-up,” he said. “The trend of paying premiums to large companies that are industry leaders isn’t likely to end so quickly. They are still safe bets.”

The SSE 50 Index of the 50 largest companies on the Shanghai bourse slumped 2.6 per cent this week, reflecting the steepest five-day decline since December 16.

State-led deleveraging to drain excessive liquidity from the financial system have helped spur demand for large companies with stable earnings. On Monday the SSE 50 Index rose to its highest level since November 2015, led higher by Ping An Insurance and liquor maker Kweichow Moutai, as investors sought protection from a sell-off in smaller firms.

In spite of the this week’s losses, the SSE 50 Index is still up 7.3 per cent this year, compared to a 0.6 per cent gain on the benchmark Shanghai Composite Index and a 7.8 per cent drop on the ChiNext index of small growth companies.

Still, the big-cap measure is a bargain on a valuation basis. It trades at 11.4 times reported earnings, 31 per cent less expensive than the Shanghai Composite and 78 per cent cheaper than the ChiNext index.

Citic Securities, the nation’s biggest listed brokerage, says large companies will remain in favour among investors, as the securities regulator unveils a slew of rules to curtail speculation. The brokerage added that the campaign to clamp down on the shadow banking system would suggest that liquidity will remain tight for the foreseeable future, which should benefit large companies as investors seek to dial back risk.

The central bank’s injection of funds into the financial system last week through the medium-term lending facility is likely a temporary reprieve, or “breather”, before interest rates continue to edge up, Qin Peijing and Yang Lingxiu, analysts at Citic Securities said. They recommend investors stay defensively positioned in property developers, brokerages and automakers.

They also cautioned against the recent rebound in the small-caps, saying the rally looks unsustainable.

Small caps are currently trading near their seven-year averages relative to the Shanghai Composite on metrics that measure the share price to company earnings as well as book value, not a level considered cheap, the analysts said.

The ChiNext index climbed 0.8 per cent this week, extending a 2.9 per cent gain a week earlier, to cap its first back-to-back weekly advance since March.

The rally in small-caps is expected to be limited because risk-free interest rates have yet to fall and a decline in earnings growth has not shown any sign of being reversed, according to strategists Wang Sheng and Fu Jingtao at Shenwan Hongyuan Group.