Economy’s entered a downward cycle that will last at least 3 years: Goldman
Reuters 10 February 2009
The dramatic rally of Chinese stocks this year is not sustainable and the market remains likely to trade in a narrow range for most of 2009, pressured by slower economic growth and a fall in corporate earnings, Goldman Sachs said yesterday.
The forecast by Thomas Deng, managing director of Goldman Sachs Asia Pacific investment research, is one of the most negative made by an analyst in recent days.
Hopes for an early economic recovery in China have pushed stocks up sharply in heavy turnover as institutional and individual investors flock back to the market.
But the CSI 300 index of blue-chip stocks will mainly move around 2,000 points this year, staying in a range of 1,980-2,200, Mr. Deng predicted. The index closed at 2,296.67 yesterday, up 59.39 points for a gain of 26.35 per cent for the year to date.
‘With bad news about China’s economy and corporate earnings expected continuously this year, we don’t expect the current rally in the index can be sustained,’ Mr. Deng told reporters, adding that the index could fall as low as 1,800 points if the outlook for the economy and corporate earnings worsened.
Mr. Deng said he believed China’s economy had entered a downward cycle which would last at least three years, similar to a slump in the late 1990s when the economy was hit by the 1997-98 Asian financial crisis.
‘Now, compared to 97/98, there are higher hurdles to cross. Growing economic openness means China will be more affected by weakening external demand than before,’ he said. ‘Internally, the contagion of the property sector downturn could be more significant now, given the growth of the sector since housing reform in 1998, among other things.’
The 300 big Chinese listed firms covered by the CSI 300 index are likely to post a 17 per cent fall in their average earnings per share in 2009, Mr. Deng predicted.
Hong Kong-listed Chinese companies, covered by the China Enterprises Index of H shares, were expected to suffer a fall of 13.4 per cent in yuan terms.
The China Enterprises Index is likely to fluctuate between 6,000 and 9,000 points, depending in part on the performance of the global and Chinese economies, Mr. Deng said.
‘It is apparent that forward price multiples have contracted significantly for both H and A-share markets in 2008 . . . H shares and A shares are effectively trading at around 12 times and 15 times forward earnings, which are somewhat close to the historical mean or median,’ Mr. Deng said.
‘Against a macro backdrop where data-points are likely to be disappointing at least in the coming quarters and earnings risks are skewed to the downside, close-to-mean/median price multiples are reasonable, if not generous, in our opinion.’
Mr. Deng recommended investors select stocks in the consumer, Internet and media, telecommunications and infrastructure sectors in the first half of this year, because of their relative earnings security and ability to ride out a market slump.
In the second half, investors could shift to property, financials such as banks and insurance, and deep cyclical stocks such as materials and shipping, he said.
‘The most important strategy for investors this year is being defensive, that is to say, investors should buy bargains but not to bet on further rises when the market is rising,’ Mr. Deng said. ‘A wise control of the size of positions that investors hold will be more important than selecting which stocks they should buy under this strategy.’
Other analysts have also warned that the market’s sudden optimism towards the Chinese economy, based largely on a better- than-expected January purchasing managers’ index (PMI) and a government- directed surge in bank lending, may be excessive.
‘Less bad news is not good news,’ Stephen Green, head of China research at Standard Chartered Bank, said in a report.
The January PMI, which remained below the neutral line of 50, showed continued weakness rather than imminent recovery, Mr. Green argued.
And despite the jump in bank loans to state projects, the private sector has been hit hardest by the economy’s slump, which is negative for employment and productivity growth, he added.
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China stocks face twin pressures
Economy’s entered a downward cycle that will last at least 3 years: Goldman
Reuters
10 February 2009
The dramatic rally of Chinese stocks this year is not sustainable and the market remains likely to trade in a narrow range for most of 2009, pressured by slower economic growth and a fall in corporate earnings, Goldman Sachs said yesterday.
The forecast by Thomas Deng, managing director of Goldman Sachs Asia Pacific investment research, is one of the most negative made by an analyst in recent days.
Hopes for an early economic recovery in China have pushed stocks up sharply in heavy turnover as institutional and individual investors flock back to the market.
But the CSI 300 index of blue-chip stocks will mainly move around 2,000 points this year, staying in a range of 1,980-2,200, Mr. Deng predicted. The index closed at 2,296.67 yesterday, up 59.39 points for a gain of 26.35 per cent for the year to date.
‘With bad news about China’s economy and corporate earnings expected continuously this year, we don’t expect the current rally in the index can be sustained,’ Mr. Deng told reporters, adding that the index could fall as low as 1,800 points if the outlook for the economy and corporate earnings worsened.
Mr. Deng said he believed China’s economy had entered a downward cycle which would last at least three years, similar to a slump in the late 1990s when the economy was hit by the 1997-98 Asian financial crisis.
‘Now, compared to 97/98, there are higher hurdles to cross. Growing economic openness means China will be more affected by weakening external demand than before,’ he said. ‘Internally, the contagion of the property sector downturn could be more significant now, given the growth of the sector since housing reform in 1998, among other things.’
The 300 big Chinese listed firms covered by the CSI 300 index are likely to post a 17 per cent fall in their average earnings per share in 2009, Mr. Deng predicted.
Hong Kong-listed Chinese companies, covered by the China Enterprises Index of H shares, were expected to suffer a fall of 13.4 per cent in yuan terms.
The China Enterprises Index is likely to fluctuate between 6,000 and 9,000 points, depending in part on the performance of the global and Chinese economies, Mr. Deng said.
‘It is apparent that forward price multiples have contracted significantly for both H and A-share markets in 2008 . . . H shares and A shares are effectively trading at around 12 times and 15 times forward earnings, which are somewhat close to the historical mean or median,’ Mr. Deng said.
‘Against a macro backdrop where data-points are likely to be disappointing at least in the coming quarters and earnings risks are skewed to the downside, close-to-mean/median price multiples are reasonable, if not generous, in our opinion.’
Mr. Deng recommended investors select stocks in the consumer, Internet and media, telecommunications and infrastructure sectors in the first half of this year, because of their relative earnings security and ability to ride out a market slump.
In the second half, investors could shift to property, financials such as banks and insurance, and deep cyclical stocks such as materials and shipping, he said.
‘The most important strategy for investors this year is being defensive, that is to say, investors should buy bargains but not to bet on further rises when the market is rising,’ Mr. Deng said. ‘A wise control of the size of positions that investors hold will be more important than selecting which stocks they should buy under this strategy.’
Other analysts have also warned that the market’s sudden optimism towards the Chinese economy, based largely on a better- than-expected January purchasing managers’ index (PMI) and a government- directed surge in bank lending, may be excessive.
‘Less bad news is not good news,’ Stephen Green, head of China research at Standard Chartered Bank, said in a report.
The January PMI, which remained below the neutral line of 50, showed continued weakness rather than imminent recovery, Mr. Green argued.
And despite the jump in bank loans to state projects, the private sector has been hit hardest by the economy’s slump, which is negative for employment and productivity growth, he added.
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