No consensus on China stocks after plunge(1)
Even after a two-year bear market wiped 33 percent from China’s benchmark stock index (SHCOMP), there’s no consensus on the direction in equity prices this year among the nation’s biggest and most accurate brokerage firms.
The Shanghai Composite Index (SHCOMP) will gain 36 percent because slowing inflation will let policy makers cut interest rates and bank reserves, according to Zhang Han, a strategist at Guotai Junan Securities Co., the only major brokerage to foresee the slump. China International Capital Corp., led by the son of a former premier, forecasts a “slight” drop since the economy isn’t slowing enough to permit “aggressive” reductions in borrowing costs, said Hao Hong, CICC’s global equity strategist.
While China avoided the global recession in 2009 and is growing more than twice as fast as the world economy, the index has been the worst among the 10 biggest markets in the past two years, according to data compiled by Bloomberg. The central bank boosted rates and reserve requirements to curb property prices and inflation that reached a three-year high in July. Premier Wen Jiabao said on Jan. 3 that business conditions may be “relatively difficult” this quarter and monetary policy will be adjusted.
“Liquidity will improve as a result of the government’s easing policies,” Zhang said in a telephone interview from Shanghai on Dec. 21. “That’ll help stocks to rebound in the first quarter.”
Earnings Growth
Zhang forecasts the Shanghai Composite, which tracks mostly yuan-denominated A shares, will rise to 3,000 this year from 2,199.42 at the end of 2011. Overseas fund managers need to be approved as qualified institutional investors to buy A shares.
Corporate earnings may rise 10 percent this year, Zhang said. Profit growth in the MSCI BRIC Index (MXBRIC) of the four largest emerging markets will slow to 5 percent from 19 percent last year, according to more than 12,000 analyst estimates compiled by Bloomberg as of Dec. 28.
The Shanghai Composite rose 2.1 percent at 11:11 a.m. local time. It dropped 1.6 percent in the first week of trading in 2012, compared with gains of more than 2 percent for gauges in Brazil, Russia and India, the other BRIC nations.
HIT Shouchuang Technology Co., a department-store owner based in Ningbo city, was the Chinese index’s best-performing (SHCOMP) stock last week with a 12 percent gain. Markor International Furniture Co., a furniture maker located in the western city of Urumqi, tumbled 21 percent for the worst performance.
The largest advance in the Shanghai Composite last year was a 195 percent surge by Shanghai-based China Fortune Land Development Co. Irico Display Devices Co., a manufacturer of television picture tubes based in Shaanxi province, sank 66 percent, the biggest decline of 2011.
Record Low
The Shanghai gauge traded at a record low (SHCOMP) 8.7 times estimated profit on Jan. 5, compared with a ratio of 9.2 for Brazil’s Bovespa Index, 5.4 for Russia’s Micex Index and 13.8 for India’s BSE India Sensitive Index, according to data compiled by Bloomberg.
Goldman Sachs Group Inc. (GS), which coined the term BRIC a decade ago, said in a Dec. 7 report that economic growth for the largest emerging nations may have peaked because of a smaller supply of new workers.
Chinese stocks will “struggle” this year as national economic growth (CNGDPYOY) exceeding 9 percent and inflation at 4 percent won’t warrant an “aggressive” easing, CICC’s Hong wrote in a Dec. 16 e-mail. Equities may plunge in the first half before recouping losses later in the year, the strategist said, without giving an index target because of company policy.
Slowdown, Volatility
‘The theme is slowdown and volatility,’’ said Hong. “It would be hasty to make a move now.”
Equities are on the “brink of capitulation” after more than 100 stocks in the Shanghai and Shenzhen (SZCOMP) stock exchanges plunged by the maximum daily limit on Jan. 5, Hong wrote in a report today. He favors utility, energy, telecommunications and consumer-staple companies.
Beijing-based China Shenhua Energy Co. (601088), the nation’s biggest coal producer, trades for 9.4 times estimated profit, data compiled by Bloomberg show. Shanghai-based China United Network Communications Ltd. (600050), the best-performing telecommunications stock in the CSI 300 Index last year, is valued at 18.9 times.
Hong isn’t in the majority in the brokerage industry. Twelve of 13 firms surveyed by Bloomberg forecast Chinese stocks will rise this year. The nation’s equities haven’t posted three straight years of declines since the Shanghai Stock Exchange opened in 1990.
Templeton’s Mobius
China will boost domestic consumption to offset an export slowdown and allow for faster gains in the yuan to tame inflation, Mark Mobius, who helps oversee about $40 billion as executive chairman of Templeton Emerging Markets Group, said in an e-mail on Dec. 14.
“The Chinese leadership has the organizational skills and policies capable of ensuring that China continues to achieve the highest gross domestic product growth of any major country in the world,” Mobius said. He favors consumer stocks (SHCOMP) because they will benefit most from rising Chinese incomes.
