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Sunday 8 November 2009
Year-end rally touted for mainland stocks
Unexpectedly strong earnings at listed mainland companies have spurred analysts to raise their profit forecasts, creating room for about a 15 per cent rise in Shanghai’s benchmark stock index over the next three months.
Unexpectedly strong earnings at listed mainland companies have spurred analysts to raise their profit forecasts, creating room for about a 15 per cent rise in Shanghai’s benchmark stock index over the next three months.
The upbeat earnings, fed by the mainland’s steady economic recovery, are restoring optimism in the stock market after last quarter’s gloom, but the rally could be derailed if the government moves more quickly than expected to tighten monetary policy.
“It’s very clear that corporate earnings, propelled by the economy’s recovery, are now improving much more quickly than the market had expected,” said Wu Xiong, research manager at Orient Securities in Shanghai. “Investors could now adjust their investment strategy and take a much more optimistic approach.”
Mainland-listed firms’ combined net profit rose 26 per cent in the third quarter from a year earlier, leading analysts to boost their forecasts for the growth of mainland corporate earnings this year to 20 per cent from a flat forecast just two months ago.
That cut the average forecast price/earnings ratio of stocks. The 12-month-forward P/E ratio on Shanghai A-shares stands at 18.3 as of this month, down from 22.6 in August and well below the all-time high of 35.1 hit in 2007 during the market’s bubble peak.
The lower P/Es, considered reasonable given the mainland’s growth potential, give the benchmark Shanghai Composite Index room to rally in the coming three months or so by about 15 percent.
That would see the index breach its 2009 high of 3,478 points early next year, fund managers, analysts and economists said in a survey. In a previous survey in early September, Orient Securities’ Wu and the others proposed a defensive investment strategy, partly because of high stock valuations. The market has staged several good-sized technical corrections since August, however, which have trimmed valuations.
The mainland’s nearly 1,700 listed firms ended their third-quarter results reporting season last weekend with a combined quarterly net profit of 290 billion yuan (HK$329.7 billion).
Analysts now expect a big fourth-quarter profit rise, especially given a very low base of just 37 billion yuan a year earlier, when listed firms took large provisions and de-stocking was at its peak as the global financial crisis dampened demand.
With the yuan widely expected to renew its rise against the US dollar, market players expect firms with substantial local-currency assets, such as banks and property counters, or with most of their costs in dollars, such as airlines, to outperform.
“As China’s economy recovers and exports improve in coming months, renewed yuan appreciation should not be a surprise,” a manager at a Chinese mutual fund in Shenzhen said. “So firms with significant yuan assets will see those assets appreciate and earnings of companies with most of their spending priced in dollars will be boosted by cost-cutting.”
The rally could also spill over into overseas stocks related to China, including components of MCSI China such as Geely Automobile and American Depository Receipts of New York-listed Chinese firms, such as oil giants Petrochina and Sinopec.
In addition, it could offer fresh impetus for foreign funds to enter the Chinese market, after a recent relaxation of restrictions on foreign portfolio investment.
Analysts said a key factor that could derail a market uptrend would be an early exit from Beijing’s relatively loose monetary policy - for example, an interest-rate increase before the start of the second quarter - as improvement in both the domestic and global economies makes such a move easier.
After a series of strong economic data issued in mid-October, including 8.9 per cent third-quarter growth in gross domestic product, and an industry survey last week showing the mainland’s manufacturing sector expanding at its fastest pace in 18 months, evidence is mounting of strong momentum in the economy.
And despite Beijing’s emphasis on policy continuity, a shift towards greater optimism in official rhetoric has unsettled the financial markets.
The indicated yield of five-year government bonds has jumped nearly 20 basis points since late September, reaching its highest level in a year last week.
“Still, most market players believe an exit from pro-growth policies will be a gradual process, leaving enough of a time gap for the index to rise above its 2009 peak by early next year,” said Shanghai Securities investment chief Zheng Weigang.
2 comments:
Year-end rally touted for mainland stocks
Lu Jianxin and Edmund Klamann
08 November 2009
Unexpectedly strong earnings at listed mainland companies have spurred analysts to raise their profit forecasts, creating room for about a 15 per cent rise in Shanghai’s benchmark stock index over the next three months.
The upbeat earnings, fed by the mainland’s steady economic recovery, are restoring optimism in the stock market after last quarter’s gloom, but the rally could be derailed if the government moves more quickly than expected to tighten monetary policy.
“It’s very clear that corporate earnings, propelled by the economy’s recovery, are now improving much more quickly than the market had expected,” said Wu Xiong, research manager at Orient Securities in Shanghai. “Investors could now adjust their investment strategy and take a much more optimistic approach.”
Mainland-listed firms’ combined net profit rose 26 per cent in the third quarter from a year earlier, leading analysts to boost their forecasts for the growth of mainland corporate earnings this year to 20 per cent from a flat forecast just two months ago.
That cut the average forecast price/earnings ratio of stocks. The 12-month-forward P/E ratio on Shanghai A-shares stands at 18.3 as of this month, down from 22.6 in August and well below the all-time high of 35.1 hit in 2007 during the market’s bubble peak.
The lower P/Es, considered reasonable given the mainland’s growth potential, give the benchmark Shanghai Composite Index room to rally in the coming three months or so by about 15 percent.
That would see the index breach its 2009 high of 3,478 points early next year, fund managers, analysts and economists said in a survey. In a previous survey in early September, Orient Securities’ Wu and the others proposed a defensive investment strategy, partly because of high stock valuations. The market has staged several good-sized technical corrections since August, however, which have trimmed valuations.
The mainland’s nearly 1,700 listed firms ended their third-quarter results reporting season last weekend with a combined quarterly net profit of 290 billion yuan (HK$329.7 billion).
Analysts now expect a big fourth-quarter profit rise, especially given a very low base of just 37 billion yuan a year earlier, when listed firms took large provisions and de-stocking was at its peak as the global financial crisis dampened demand.
With the yuan widely expected to renew its rise against the US dollar, market players expect firms with substantial local-currency assets, such as banks and property counters, or with most of their costs in dollars, such as airlines, to outperform.
“As China’s economy recovers and exports improve in coming months, renewed yuan appreciation should not be a surprise,” a manager at a Chinese mutual fund in Shenzhen said. “So firms with significant yuan assets will see those assets appreciate and earnings of companies with most of their spending priced in dollars will be boosted by cost-cutting.”
The rally could also spill over into overseas stocks related to China, including components of MCSI China such as Geely Automobile and American Depository Receipts of New York-listed Chinese firms, such as oil giants Petrochina and Sinopec.
In addition, it could offer fresh impetus for foreign funds to enter the Chinese market, after a recent relaxation of restrictions on foreign portfolio investment.
Analysts said a key factor that could derail a market uptrend would be an early exit from Beijing’s relatively loose monetary policy - for example, an interest-rate increase before the start of the second quarter - as improvement in both the domestic and global economies makes such a move easier.
After a series of strong economic data issued in mid-October, including 8.9 per cent third-quarter growth in gross domestic product, and an industry survey last week showing the mainland’s manufacturing sector expanding at its fastest pace in 18 months, evidence is mounting of strong momentum in the economy.
And despite Beijing’s emphasis on policy continuity, a shift towards greater optimism in official rhetoric has unsettled the financial markets.
The indicated yield of five-year government bonds has jumped nearly 20 basis points since late September, reaching its highest level in a year last week.
“Still, most market players believe an exit from pro-growth policies will be a gradual process, leaving enough of a time gap for the index to rise above its 2009 peak by early next year,” said Shanghai Securities investment chief Zheng Weigang.
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