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Analyst: Stock market prospects improve
By Feng Jianmin |
May 13, 2013, Monday
|
Print Edition
Print Edition
CHINA'S yuan-denominated Class A shares have been disappointing domestic investors for years, with performance lagging the country's economic growth.
Since the end of 2012, the benchmark Shanghai Composite Index has fallen 1 percent.
So what's the outlook for the remainder of 2013?
We asked Chen Li, head of China equity strategy at UBS Securities, to share with Shanghai Daily his views on where the market is headed and what factors will influence its movement.
Q: How do you expect stocks to perform in the coming months?
The market is likely to rebound in the second quarter, driven by an improving economic outlook and abundant liquidity. The 3 percent gain in the Shanghai Composite Index in the past two weeks is a signal of improving sentiment.
Although China's gross domestic product growth fell in the first quarter to 7.7 percent year on year, we believe it will pick up in this quarter and the next, bolstering the stock market.
We expect total social financing to rise 20 percent in the second quarter, slower than the first quarter but still strong enough to sustain economic development
We note that the China Banking Regulatory Commission has released rules aimed at containing banks' off-sheet fund-raising. But, in the worst case, if all such fund-raising activities stopped in April, the size of social financing in the second quarter will still remain the same as last year. There is not much to worry about.
Q: After first-quarter GDP growth slowed manufacturing expansion in April, missing expectations, why do you think the economy will pick up this quarter?
There are some micro-economic indicators that reveal the trend of mild recovery. For example, we noticed property sales jumped 40 percent in April from a year ago, sales of industrial equipment rose for the first time in a year and electricity supply may have risen 7 percent in April, 5 percentage points more than in March.
These are positive signs somehow not reflected in the purchasing managers' index in April. People used to debate whether China will see a strong or weak economic recovery this year, but now it's more of a debate between weak or no recovery. We believe there is still weak recovery going on.
Q: Which industries are most likely to be the first to recover?
The growth of the property sector has been very surprising and strong. The 40 percent annual growth in April was on top of 30 percent annual growth in April last year.
The country's controlling measures have greatly cut speculation, and now growth is mainly driven by end-users. Cars and home appliances also have been selling well.
The consumption of such durable goods reveals a strong increase in household income, and that will help lift other aspects of the economy. China is steering away from dependence on infrastructure investment, so it is important to monitor those consumer-driven industries.
Q: What industries or sectors will likely be the most profitable for stock investors?
Autos, home appliances and property developers are our favorite sectors. Their growth is strong, and the prices of their stocks are relatively low.
Among small caps, healthcare, environment protection, media and electronic products sectors were the best performers in the market in the first quarter.
They are still likely to attract investors, but we have to warn about a grimmer outlook for electronic products. Their stock prices are very vulnerable once consumption starts to weaken.
Small caps are also prone to two risks. First, if future pricing of initial public offering declines due to a weak market, stock prices of small caps will fall as well. Second, more shares held by insiders and shareholders will be unlocked this year, putting pressure on share prices.
Q: What industries should investors avoid?
We don't like commodities. Currently, inventories are very high, and the economic situations in China and the US are not heavily dependent on resources.
We stay neutral on banks. Profitability of banks is still on the rise, but there are regulatory concerns, such as whether the regulator will further tighten off-balance sheet fund-raising activities.
Q: How will overseas economic uncertainty and cross-border money flows impact the domestic stock market?
We are very confident about economic recovery in the US, stabilization in Europe and improvement in Japan because of super easy monetary policies.
China will certainly benefit if the global economy does pick up this year or early next year. Chinese companies' profitability will start to improve in the second quarter, supporting their share prices.
I just participated in road shows in Europe in the past weeks and found value investors there are still very interested in China's A shares.
Long-term investors are interested not so much in how much money they can make from China's stock market in the short term, but rather, whether there will be legitimate and stable access to the market.
As the regulator makes efforts to liberate the domestic capital market and as pricing of A shares is currently relatively low, we think the market is very attractive to foreign investors.
Q: Have you set specific targets for the stock market this year?
I still maintain the prediction I made earlier this year. I think the Shanghai Composite Index and the CSI300 index will rise by 20 percent by the year-end. As the economic recovery is mild, investment return from the stock market will be moderate. I think corporate profits may rise 11 to 12 percent annually this year, and valuation may only add between 5 to 10 percent.
Thus investment return in the stock market may be at most 20 percent. Such return is in line with the weak economic recovery.
Since the end of 2012, the benchmark Shanghai Composite Index has fallen 1 percent.
So what's the outlook for the remainder of 2013?
We asked Chen Li, head of China equity strategy at UBS Securities, to share with Shanghai Daily his views on where the market is headed and what factors will influence its movement.
Q: How do you expect stocks to perform in the coming months?
The market is likely to rebound in the second quarter, driven by an improving economic outlook and abundant liquidity. The 3 percent gain in the Shanghai Composite Index in the past two weeks is a signal of improving sentiment.
Although China's gross domestic product growth fell in the first quarter to 7.7 percent year on year, we believe it will pick up in this quarter and the next, bolstering the stock market.
We expect total social financing to rise 20 percent in the second quarter, slower than the first quarter but still strong enough to sustain economic development
We note that the China Banking Regulatory Commission has released rules aimed at containing banks' off-sheet fund-raising. But, in the worst case, if all such fund-raising activities stopped in April, the size of social financing in the second quarter will still remain the same as last year. There is not much to worry about.
Q: After first-quarter GDP growth slowed manufacturing expansion in April, missing expectations, why do you think the economy will pick up this quarter?
There are some micro-economic indicators that reveal the trend of mild recovery. For example, we noticed property sales jumped 40 percent in April from a year ago, sales of industrial equipment rose for the first time in a year and electricity supply may have risen 7 percent in April, 5 percentage points more than in March.
These are positive signs somehow not reflected in the purchasing managers' index in April. People used to debate whether China will see a strong or weak economic recovery this year, but now it's more of a debate between weak or no recovery. We believe there is still weak recovery going on.
Q: Which industries are most likely to be the first to recover?
The growth of the property sector has been very surprising and strong. The 40 percent annual growth in April was on top of 30 percent annual growth in April last year.
The country's controlling measures have greatly cut speculation, and now growth is mainly driven by end-users. Cars and home appliances also have been selling well.
The consumption of such durable goods reveals a strong increase in household income, and that will help lift other aspects of the economy. China is steering away from dependence on infrastructure investment, so it is important to monitor those consumer-driven industries.
Q: What industries or sectors will likely be the most profitable for stock investors?
Autos, home appliances and property developers are our favorite sectors. Their growth is strong, and the prices of their stocks are relatively low.
Among small caps, healthcare, environment protection, media and electronic products sectors were the best performers in the market in the first quarter.
They are still likely to attract investors, but we have to warn about a grimmer outlook for electronic products. Their stock prices are very vulnerable once consumption starts to weaken.
Small caps are also prone to two risks. First, if future pricing of initial public offering declines due to a weak market, stock prices of small caps will fall as well. Second, more shares held by insiders and shareholders will be unlocked this year, putting pressure on share prices.
Q: What industries should investors avoid?
We don't like commodities. Currently, inventories are very high, and the economic situations in China and the US are not heavily dependent on resources.
We stay neutral on banks. Profitability of banks is still on the rise, but there are regulatory concerns, such as whether the regulator will further tighten off-balance sheet fund-raising activities.
Q: How will overseas economic uncertainty and cross-border money flows impact the domestic stock market?
We are very confident about economic recovery in the US, stabilization in Europe and improvement in Japan because of super easy monetary policies.
China will certainly benefit if the global economy does pick up this year or early next year. Chinese companies' profitability will start to improve in the second quarter, supporting their share prices.
I just participated in road shows in Europe in the past weeks and found value investors there are still very interested in China's A shares.
Long-term investors are interested not so much in how much money they can make from China's stock market in the short term, but rather, whether there will be legitimate and stable access to the market.
As the regulator makes efforts to liberate the domestic capital market and as pricing of A shares is currently relatively low, we think the market is very attractive to foreign investors.
Q: Have you set specific targets for the stock market this year?
I still maintain the prediction I made earlier this year. I think the Shanghai Composite Index and the CSI300 index will rise by 20 percent by the year-end. As the economic recovery is mild, investment return from the stock market will be moderate. I think corporate profits may rise 11 to 12 percent annually this year, and valuation may only add between 5 to 10 percent.
Thus investment return in the stock market may be at most 20 percent. Such return is in line with the weak economic recovery.
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