Bull market momentum builds up in China stocks as benchmark and turnover surge to multi-year highs
- Shanghai Composite Index rises 5.7 per cent to a two-year high
- Combined daily turnover on Shanghai and Shenzhen bourses hit a five-year high of US$213.2 billion
A 5.7 per cent surge in the Shanghai Composite Index, led by brokerages and banks, pushed the gauge to a two-year high on Monday, with the combined turnover on the Shanghai and Shenzhen exchanges hitting a five-year high of 1.5 trillion yuan (US$213.2 billion).
China Securities Journal, a newspaper affiliated with Xinhua news agency, said in a front-page commentary that a further run-up is expected because of favourable government policies.
Technically, the Shanghai Composite has been in bull territory since March last year after a 20 per cent gain. Still, sentiment remained lacklustre then, as investors’ appetite for equities shrank with the government scaling back loosening policies. At the height of the coronavirus outbreak early this year, the index had plunged by as much as 19 per cent, almost slipping into a bear market.
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“Corporate profits are expected to post double-digit growth in the second half,” said Xun Yugen, a strategist at Haitong Securities in Shanghai. “The market will trend further higher, driven by both earnings growth and valuation expansion.”
Profit growth for all mainland-traded companies will probably accelerate to 13 per cent this quarter and 20 per cent in the following three-month period, compared to a 24 per cent decline in the first free months of the year, according to Haitong Securities’ estimates.
With major state media hyping up the market, traders see that as a sign of government support for further gains in stocks. A solid economic recovery and a spate of reform measures have laid the foundation for a bull market and China needs a rising market to fund its economic transformation and develop hi-tech industries, China Securities Journal said.
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The rapid rally has cheered individual investors, who contribute to about 80 per cent of stock transactions in China. “It’s truly a bull market,” said Chen Yifeng, an accountant at a state-owned company in Shanghai. “I think there’s room for further upside because China’s economy is doing much better than any other in the world. That matters most to investors.”
Financials led the gains on the broader market on Monday, with China Merchants Bank and Citic Securities surging by the 10 per cent daily limit, on expectations that further monetary loosening will boost low-valuation big-caps that have lagged behind for most of the year.
The rally in big-caps is simply a catch-up that will probably last for one or two weeks before buying rotates to technology stocks again, said Lu Pin, a strategist at Citic Securities. Still, the rapid gain in share prices has raised concerns about a quick boom-to-bust cycle that resulted in US$5 trillion wiped out in market capitalisation in 2015. At that time, speculators had ramped up leveraged buying and drove up the valuation of the ChiNext gauge to more than 100 times earnings.
The current trading pattern suggests that the run-up has a lot more momentum left, as Shanghai Composite’s breach of its 850-day moving average marks an inflection point of stocks, according to Hong Hao, managing director at Bocom International Holdings in Hong Kong.
“Value and beaten-up cyclicals should start to outperform,” he said. “In the eyes of a value investor, there are opportunities everywhere,” he said.