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Mainland shares may rebound soon as liquidity turns better
By Hou Zhenhai and Wang Hui |
July 12, 2012, Thursday
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Print Edition
Print Edition
THE A-share market took a roller coaster ride last week, with the Shanghai Composite Index once dipping below 2,200 points and previous gainers such as those listed in the Small and Medium-sized Enterprise Board and ChiNext in Shenzhen still being actively traded.
Last Thursday, the People's Bank of China announced a rate cut, a move which came earlier than expected. On one hand, this points to disappointing economic data in the second quarter of this year while rapid disinflation also leaves more space for rate cuts.
On the other hand, it reflects the government's intention of stabilizing economic growth and the higher likelihood of bigger-than-expected policy relaxation in the third quarter.
It is an asymmetric rate cut with the lending rate floor being reduced to 70 percent the benchmark, which can lower funding costs, stimulate effective credit demand and alleviate the economic downturn.
But the ultimate effect will still be restrained by companies' stretched gearing ratios and banks' loan-deposit rate requirements.
Approaching tolerance
However, we believe more policies will be taken to boost the economy as second-quarter data may approach, or even fall below, the policy makers' tolerance. And the market liquidity may continue to improve and a reserve requirement ratio cut is still possible in mid- or late-July.
We have some interesting finds in the two market rebounds in the first half: 1) theme stocks sensitive to policy expectations and fundamental data; and 3) real estate, food & beverages and small caps were the most sensitive to liquidity improvements; 2) cyclicals were the most and securities plays outran the overall market amid the two market rallies, despite their previous smaller declines.
We reiterate our view that meaningful rallies may occur in July-August and investors could turn a bit more aggressive in July. Specifically, investors are advised to watch SMEs, theme plays and less-new stocks in early third quarter as market liquidity improves, but not advised to buy at highs. In mid-July, investors should turn to interest rate-sensitive sectors such as real estate, securities and insurance. In late-July and August, investors can build exposure to some cyclicals including cement, building materials, railway infrastructure, construction machinery and chemical materials as the market may turn more optimistic about the economy and policy.
Hou Zhenhai and Wang Hui are analysts with China International Capital Corp, the nation's No.1 investment bank. The article was from a Weekly Strategy report dated July 9. The opinions are their own.
Last Thursday, the People's Bank of China announced a rate cut, a move which came earlier than expected. On one hand, this points to disappointing economic data in the second quarter of this year while rapid disinflation also leaves more space for rate cuts.
On the other hand, it reflects the government's intention of stabilizing economic growth and the higher likelihood of bigger-than-expected policy relaxation in the third quarter.
It is an asymmetric rate cut with the lending rate floor being reduced to 70 percent the benchmark, which can lower funding costs, stimulate effective credit demand and alleviate the economic downturn.
But the ultimate effect will still be restrained by companies' stretched gearing ratios and banks' loan-deposit rate requirements.
Approaching tolerance
However, we believe more policies will be taken to boost the economy as second-quarter data may approach, or even fall below, the policy makers' tolerance. And the market liquidity may continue to improve and a reserve requirement ratio cut is still possible in mid- or late-July.
We have some interesting finds in the two market rebounds in the first half: 1) theme stocks sensitive to policy expectations and fundamental data; and 3) real estate, food & beverages and small caps were the most sensitive to liquidity improvements; 2) cyclicals were the most and securities plays outran the overall market amid the two market rallies, despite their previous smaller declines.
We reiterate our view that meaningful rallies may occur in July-August and investors could turn a bit more aggressive in July. Specifically, investors are advised to watch SMEs, theme plays and less-new stocks in early third quarter as market liquidity improves, but not advised to buy at highs. In mid-July, investors should turn to interest rate-sensitive sectors such as real estate, securities and insurance. In late-July and August, investors can build exposure to some cyclicals including cement, building materials, railway infrastructure, construction machinery and chemical materials as the market may turn more optimistic about the economy and policy.
Hou Zhenhai and Wang Hui are analysts with China International Capital Corp, the nation's No.1 investment bank. The article was from a Weekly Strategy report dated July 9. The opinions are their own.
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