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Monday 7 September 2009
No reason for mainland stock jitters
Just as mainland stocks often rise without fundamental support, they are now tanking even though companies just had a better-than-expected earnings season.
Just as mainland stocks often rise without fundamental support, they are now tanking even though companies just had a better-than-expected earnings season.
Fears about a policy shift towards tighter liquidity are blamed for the over 20 per cent decline in the Shanghai market from its August peak. But those fears are largely overblown. Beijing might be talking about boosting domestic consumption, but structural reforms take time and there is little the authorities can do other than continuing to reinflate the economy in the short run.
There are encouraging signs that corporate profits - the fundamental basis for share prices - are on the turn. Mainland companies’ earnings for the past quarter rose 36 per cent compared with the previous three months, helped by strong results from banks and property firms. Companies also offered a more optimistic outlook, propelling a string of earnings upgrades.
The purchasing managers’ index, released on Tuesday, confirms the mainland’s manufacturing sector is keeping up its steady recovery.
Stocks are trading at about 20 times forecast profits for next year. This is higher than the rest of the region, but mainland companies enjoy higher growth rates: earnings are projected to grow 20 per cent this year. And compared with historical valuations, which range from the low teens to 50 times earnings, current prices do not look excessive.
Last week Premier Wen Jiabao tried to ease concerns when he said the economy was at a crucial juncture in its recovery and the government would not change its policy direction. But investors are taking their cue from the chorus of alarms sent by lower-level government officials, academics, and lawmakers. Meanwhile, the banking supervision commission has been cracking down on bank loans that make their way into stocks and property.
But even if Chinese banks stop lending in the second half, the swathe of loans made in the first half will continue to work their way through the system. New lending in the first half amounted to an eye-popping 50 per cent of gross domestic product on an annualised basis. Even if the ratio slumps to 10 per cent in the second half, on average new loans as a percentage of GDP this year will still be double the 15 per cent annual growth rate of the past three years.
In addition, as the flood of short-term bills - which banks accepted from companies to boost lending volumes - start to mature, banks are diverting cash into long-term loans tied to real projects that should help the economy in coming months.
Beijing’s monetary fine-tuning still looks marginal, even with July’s abrupt credit slowdown and a similarly subdued number expected for August. That is because rising foreign capital inflows will offset some of the drop in bank credit.
Technical indicators also suggest the stock market has fallen too far. Mainland stocks had more than doubled between October and August and were ripe for a correction. Trading volumes have fallen substantially since the recent peak.
It is hard to call the bottom. But one thing that looks certain is that mainland companies and the economy have proven to be stronger than expected. And it would be a mistake to bet on Beijing undermining the economy and the stock market by tightening too early.
No reason for mainland stock jitters
ReplyDeleteWei Gu
06 September 2009
Just as mainland stocks often rise without fundamental support, they are now tanking even though companies just had a better-than-expected earnings season.
Fears about a policy shift towards tighter liquidity are blamed for the over 20 per cent decline in the Shanghai market from its August peak. But those fears are largely overblown. Beijing might be talking about boosting domestic consumption, but structural reforms take time and there is little the authorities can do other than continuing to reinflate the economy in the short run.
There are encouraging signs that corporate profits - the fundamental basis for share prices - are on the turn. Mainland companies’ earnings for the past quarter rose 36 per cent compared with the previous three months, helped by strong results from banks and property firms. Companies also offered a more optimistic outlook, propelling a string of earnings upgrades.
The purchasing managers’ index, released on Tuesday, confirms the mainland’s manufacturing sector is keeping up its steady recovery.
Stocks are trading at about 20 times forecast profits for next year. This is higher than the rest of the region, but mainland companies enjoy higher growth rates: earnings are projected to grow 20 per cent this year. And compared with historical valuations, which range from the low teens to 50 times earnings, current prices do not look excessive.
Last week Premier Wen Jiabao tried to ease concerns when he said the economy was at a crucial juncture in its recovery and the government would not change its policy direction. But investors are taking their cue from the chorus of alarms sent by lower-level government officials, academics, and lawmakers. Meanwhile, the banking supervision commission has been cracking down on bank loans that make their way into stocks and property.
But even if Chinese banks stop lending in the second half, the swathe of loans made in the first half will continue to work their way through the system. New lending in the first half amounted to an eye-popping 50 per cent of gross domestic product on an annualised basis. Even if the ratio slumps to 10 per cent in the second half, on average new loans as a percentage of GDP this year will still be double the 15 per cent annual growth rate of the past three years.
In addition, as the flood of short-term bills - which banks accepted from companies to boost lending volumes - start to mature, banks are diverting cash into long-term loans tied to real projects that should help the economy in coming months.
Beijing’s monetary fine-tuning still looks marginal, even with July’s abrupt credit slowdown and a similarly subdued number expected for August. That is because rising foreign capital inflows will offset some of the drop in bank credit.
Technical indicators also suggest the stock market has fallen too far. Mainland stocks had more than doubled between October and August and were ripe for a correction. Trading volumes have fallen substantially since the recent peak.
It is hard to call the bottom. But one thing that looks certain is that mainland companies and the economy have proven to be stronger than expected. And it would be a mistake to bet on Beijing undermining the economy and the stock market by tightening too early.