Across The Border

2017 is shaping up as a good year for China’s equity markets, and more positive news is in store, analysts say

PUBLISHED : Friday, 31 March, 2017, 3:18pm
UPDATED : Friday, 31 March, 2017, 11:00pm

Mainland investors have reasons to expect a turnaround on the A-share market after two global asset management groups exhibited their bullishness about China’s economy and corporate performance.

But it remains to be seen whether the more than 100 million mainland individual investors would be convinced of improved fundamentals.

Franklin Templeton Investments said it was optimistic about China after the world’s second-largest economy showed stability over the past few months.

“We see more opportunities in emerging markets in 2017 despite some uncertainties,” said Stephen Dover, chief investment officer of Templeton Emerging Markets. “With numerous favourable factors, including the stabilisation of the Chinese economy, we believe that there is still room for emerging markets to further catch up.”

Beijing, aiming to conduct a transition of the Chinese economy into a slower but more sustainable growth pattern, has been encouraging the use of internet technology to bolster consumer spending.

“One of the things that you hear is China has a lot of copycat technologies, but I think it is incorrect,” said Dover. “There is a great opportunity in China that is missed by foreign investors.”

Sectors making up the new economy in China include e-commerce, financial technologies, online platforms for businesses such as bicycle sharing and traditional manufacturing sectors that effectively use internet technologies to fast-track growth.

Dover said some of the small and mid-cap companies on the mainland were not well followed by global investors.

The ChiNext startup board index trades at a price to earnings (P/E) multiple of 65, whereas the Shanghai Stock Exchange trades at a P/E multiple of 17.

Fidelity International also voiced confidence in China’s economy.

“After two years of soft readings, our analysts’ renewed confidence in China, due to improving capital returns and balance sheet strength in particular, reveals that fears on the ground of a hard landing have receded considerably,” said Catherine Yeung, investment director with Fidelity Worldwide Investment. “China is also the region where analysts expect the least expansion in headcount over the next year. This shows that China is climbing the value chain towards higher-quality growth that embraced higher levels of automation.”

CSRC’s reform plans in the offing, now market’s stabilised

The global index compiler MSCI has started consulting with investors about the inclusion of A-shares into its emerging market benchmarks.

MSCI rejects adding China A-shares to leading indices for third year in a row

Last June the MSCI decided not to include A-shares in its emerging market indices, reflecting the third straight year they’ve been rejected in the annual review. In this year’s assessment MSCI proposes to include only 169 mainland large-cap stocks in its emerging markets benchmark, less than half the 448 companies of all sizes previously considered.

It is believed that the inclusion of A-shares in the MSCI indicators would trigger capital inflows worth billions of dollars to the mainland stocks as global funds track the benchmarks.

The benchmark Shanghai Composite Index has traded flat to slightly higher this year, rising 3.4 per cent as of Thursday’s close, after slumping 12.3 per cent in 2016.

“Retail investors believe that it’s safe to buy shares at the current level,” said analyst Liu Qiaoyu of Huatai Securities. “But it’s difficult for them to pick out the right stocks to buy.”

“Technology’s position is unique. It is the disruptor for all other sectors, but the sector itself is not disrupted by those other industries,” Yeung said. “While certain consumer markets such as smartphones are relatively mature, there is still considerable scope for IT to penetrate other sectors such as industry and agriculture.”

In 2015, the China Securities Regulatory Commission (CSRC) attempted to create a new board slated for emerging industries, which was likely to attract dozens of US-listed Chinese technology companies.

It scrapped the plan in March last year, partly to allay concerns about a fresh equity influx to the weak market.

However, policies to support technology firms could be back on the regulator’s agenda. Believed to be taking shape is a fast-track IPO process for tech companies as a way to alleviate listing delays as the queue stretches to hundreds of companies.

Reports say regulators are studying ways to allow technology firms such as Qihoo 360 Technology list A-shares as soon as possible.