Posted on Wednesday, June 30th, 2010 | In Australia, Market Commentary, Singapore
China, the worst-performing stock market
after Greece, looks like a buy by almost any measure, according to
top-ranked analysts of the Asian nation’s shares.
The Shanghai Composite Index’s 26 percent plunge this year,
including yesterday’s 4.3 percent slump, sent its price-earnings ratio
to 18, the lowest level versus the MSCI Emerging Markets Index in a
decade. The largest owners of yuan-denominated stocks have turned net
buyers for the first time since equities bottomed in 2008, while
international investors are paying the biggest premium in 21 months to
bet on a rally in funds that hold China’s yuan-denominated or A shares,
data compiled by Macquarie Group Ltd. and Bloomberg show.
Morgan Stanley, BNP Paribas SA and Nomura Holdings Inc. say stocks
will rally as China’s June 19 decision to end the yuan’s two-year peg to
the dollar helps curb inflation and asset bubbles. The Shanghai index
rose 62 percent in 12 months after China last allowed a more flexible
exchange rate in July 2005.
”We are very bullish,” said Jerry Lou, the Hong Kong- based
strategist at Morgan Stanley, among the top-ranked analysts for China
stocks by Institutional Investor, who predicts the Shanghai Composite
may climb 65 percent to 4,000 by June 2011. “We like valuations and
inflation will peak. All we need is a catalyst such as a change in yuan
Prospects for a stock rebound may be cut as China’s exports face
“strong headwinds” in the second half and loan growth may slow by the
end of 2010, Citigroup Inc. said this week, even as the average of 14
economist estimates in a Bloomberg survey calls for economic growth of
10.2 percent this year and 9.2 percent in 2011.
The Conference Board yesterday revised its leading economic index
for China, contributing to the biggest sell-off in Chinese equities in
six weeks. Agricultural Bank of China Ltd., which priced the Shanghai
portion of its $20.1 billion initial share sale, also drove banking
The Shanghai Composite fell for a sixth day today, losing
0.8 percent to 2,408.46 at 10:14 a.m. Its slump this year is second only
to the 35 percent plunge in Greece’s ASE Index among the world’s 60
biggest stock markets, according to data compiled by Bloomberg.
Companies on the Shanghai gauge will increase earnings by 40 percent in
12 months, more than double the pace of the ASE, analysts’ estimates by
Rising profits reduced the Shanghai Composite’s valuation premium
over the MSCI emerging index to 26 percent, down from an average of 140
percent since 1997, based on weekly price- earnings ratios compiled by
Bloomberg. The last time the gap was so small in February 2000, the
Shanghai Composite gained 27 percent in 12 months, while the MSCI
measure sank 26 percent.
Lower valuations spurred the biggest Chinese investors to buy last
month. Shareholders who own at least 5 percent of a company’s stock
boosted their holdings by 1.1 billion yuan ($162 million), according to
Macquarie analysts Michael Kurtz and Shirley Zhao in Shanghai, basing
their analysis on data from Wind Information. Similar purchases in
October 2008 signaled the end of the Shanghai Composite’s year-long bear
market, with the gauge rallying 82 percent from its low on Oct. 28,
2008, through October 2009.
Yuan-denominated shares, restricted almost exclusively to local
investors, fell below Chinese stocks traded in Hong Kong this month for
the first time in almost four years, according to the Hang Seng China AH
Premium Index. When A shares last traded at a discount in November 2006,
the Shanghai Composite tripled in 12 months, outpacing a 156 percent
gain in the Hong Kong benchmark index and a 58 percent rise in the MSCI
‘Pay for Exposure’
”The premium between A and H shares is disappearing,”
said Hao Hong, Beijing-based global equity strategist at China
International Capital Corp., the top-ranked brokerage for China research
in Asiamoney’s annual survey. That indicates “foreign investors are
willing to pay for exposure to China’s stocks.”
International investors pushed the price of BlackRock Inc.’s
iShares FTSE/Xinhua A50 China Index exchange-traded fund to 11 percent
above the value of its underlying assets last week, the highest level in
almost two years, according to data compiled by Bloomberg. The fund
trades in Hong Kong and tracks the 50 biggest A-share companies.
The Shanghai Composite fell 22 percent this quarter, lagging behind
gauges in the other so-called BRIC markets of the largest developing
economies, after China raised banks’ reserve requirements to the highest
level in at least three years and curbed real-estate speculation.
Property prices rose 12.4 percent in May from a year earlier, the
second-fastest pace after April’s 12.8 percent record gain.
Brazil’s Bovespa index dropped 8.7 percent during the period and
Russia’s Micex slipped 8 percent, while India’s Bombay Stock Exchange
Sensitive Index advanced 0.2 percent. The MSCI emerging gauge lost 7.6
The New York-based Conference Board corrected its April gauge for
the outlook of China’s economy this week, saying its leading index for
the country rose the least since November, rather than registering the
biggest gain in 14 months.
A flood of new stock may also weigh on the market, according to
Credit Suisse Group AG’s Sakthi Siva. Chinese companies will sell about
320 billion yuan ($47 billion) of new shares in Shanghai and Shenzhen
this year as they fund expansion and banks bolster capital after a
record amount of government- led lending, PricewaterhouseCoopers
Agricultural Bank’s share sale in Shanghai and Hong Kong is the
biggest initial public offering since Industrial & Commercial Bank of
China Ltd.’s $21.9 billion sale almost four years ago.
”I’m still quite cautious,” Siva, the Singapore-based top-ranked
Asia strategist in Institutional Investor’s 2010 poll, said in an
interview. “There’s quite a lot of supply.”
Ending the fixed 6.83 yuan peg to the dollar should help “contain
inflation and asset bubbles,” China’s central bank said in a June 20
statement. Inflation will probably peak at 3.7 percent toward the end of
the third quarter then “level off”
the rest of the year, according to CICC’s Hong.
Chinese authorities had prevented the currency from strengthening
against the dollar since July 2008 to help exporters cope with the
global financial crisis.
The yuan appreciated 21 percent in the three years after a managed
float against a basket of currencies was introduced in 2005.
Twelve-month non-deliverable forwards yesterday indicate investors are
betting the yuan will strengthen 1.6 percent. A yuan revaluation won’t
happen quickly or fix all of the global economy’s imbalances,
International Monetary Fund Managing Director Dominique Strauss-Kahn
said this week.
Vanke, China Merchants
China Vanke Co., the Shenzhen-based property developer that sank 37
percent this year, trades for 13 times reported profits, down from 35
times a year ago, according to data compiled by Bloomberg. Earnings
growth of 29 percent this year will help lift the stock 42 percent,
according to analyst estimates on Bloomberg.
China Merchants Bank Co.’s 2.7 price-to-book ratio is near a record
low relative to the MSCI Emerging Markets Financials Index after the
Shenzhen-based company declined 24 percent this year. The stock is
poised to surge 49 percent in 12 months, according to analysts, who have
35 “buy” ratings and one “sell,” according to data compiled by
Consumer-related shares will benefit from a shift in the economy to
increase domestic spending, said Leo Gao, who helps oversee about $600
million at APS Asset Management Ltd. in Shanghai, whose APS China Alpha
Fund has beaten 87 percent of peers in the past year, according to
”Stocks will end the year higher,” Gao said.
About Raymond Teo (http://www.raymondteo.com)
Raymond Teo is an Investor and and the editor of several investment websites.