AFTER 17 years in the stock markets, Wang Youzhen considers herself luckier than most. While other small investors have been bruised by losses in a volatile market, Wang proudly claims she's still making profits.

Only just.

Wang, 54, who says she managed to stay in the black even during the market's darkest days of the last two decades, admits the going is very tough at present. She's barely breaking even after making more than 600,000 yuan (US$92,736) from stock trading last year.

"I don't think there will be a lot of chances to win this year," Wang said, with obvious frustration. "The market will probably see little momentum and remain sloppy until the end of the year."

The reasons behind her pessimism - a sentiment widely shared among investors - are many. Tighter credit, a flood of new listings and a shift of liquidity toward bank financial products are all taking the smile off the faces of bulls, according to Wang.

Indeed, the bears are out in force. China's leading brokerage houses are making sour predictions for the next six months, warning that share prices may be facing a hard landing.

As of yesterday, the Shanghai Composite Index, the benchmark tracking the biggest mainland stock market, had shed 2.4 percent this year to 2,758.23. It is one of the worst performing markets in Asia so far this year and last, even underperforming the quake-battered Nikkei 225 average in Japan.

Nearly 80 percent of shares in the Shanghai market have lost ground this year. China International Capital Corp, the leading Chinese investment bank, warned in its half-year preview that things won't be looking up much in the coming months.

Investors switch tactics

Concerns about China's growth have followed successive central bank moves to tighten credit, the report said. Large sums of money are leaving the stock market and pouring into financial products offered by banks and institutional funds. The Shanghai composite could lose a further 10 percent this year, it said.

Early July could see the index fall below 2,700 points, weighed down by what is expected to be an inflation peak in June and the lowest monthly growth in manufacturing indexes such as the Purchasing Managers Index, CICC said.

Price-to-earnings ratios for new listings tell a similar story, the bank said. IPO price-to-earnings ratios now stand at an average multiple of 29, down from an historic high of 77 last October.

CICC said it doesn't expect the market to hit bottom until the PE multiple of new IPOs plunges below 20 or until market authorities are forced to suspend approvals for new listings.

Guotai Jun'an Securities agrees that July and August will be the most painful period, as disappointing half-year corporate earnings, due to be reported soon, fuel investor pessimism.

The Shanghai-based brokerage projects that second-quarter corporate profit growth, excluding banks, may be near zero or even turn negative. That means many firms may be seeing red in their accounts. Profits won't start to pick up early next year, when inflation drops to 3 percent and the central bank begins easing monetary policy, Guotai Jun'an said.

One thing is sure, Guotai Jun'an said, liquidity will be tighter in the second half.

Growth in M1, the narrow measure of money supply covering cash in circulation plus demand deposits, is expected to drop to a low of 10 percent for the year in the fourth quarter. That compares with a 12.7 percent pace in May, according to Guotai Jun'an.

For now, financial products promoted by banks, trusts and hedge funds are making serious inroads in the competition for investors' money, said CICC.

Commercial banks in the mainland raised a total of 8.25 trillion yuan from 7,891 new financial products issued by June 21 this year, compared with 7.05 trillion yuan last year, according to China Benefit Co, a financial research firm based in the southwestern city of Chengdu.

Inflows to new mutual fund firms in the first five months totaled 163.09 billion yuan.

These financial products offer investors an average annual return of nearly 5 percent, depending on the maturity of the products.

Five percent is quite attractive to individual investors like Wang, who said she has already withdrawn a large chunk of her money from the stock market and invested it in bank products. She has reduced her portfolio exposure to shares to between 30 and 40 percent.

So does all this mean the stock market has nothing to offer in the next six months?

Not quite, say CICC and Guotai Jun'an.

The two brokerages say the third quarter could be the worst of times in terms of overall market performance this year but the best of times for finding cheap bargains.

Zhong Hua, an analyst with Guotai Jun'an, suggested investors venturing into the market should stick with defensive plays, like financial shares. Banks, the brokerage said, aren't likely to tumble as much as most shares and are better poised when a rebound occurs.

CITIC Securities, the mainland's largest listed brokerage, also favors the banking sector. The Hong Kong prices of some dual-listed lenders are 6 percent to 30 percent higher than their prices in mainland markets, suggesting some catching up to do.

Lenders are expected to report a 35 percent rise in earnings in the second and third quarters, CITIC added.

Both Changjiang Securities and Shenyin Wanguo Securities are advising investors that lenders such as Minsheng Bank and China Merchants Bank could be ideal investments in these tough times.

Minsheng has gained 18.9 percent this year, closing at 6.03 yuan on Friday. The bank was suspended from trading yesterday. China Merchants has climbed 1.92 percent to 13.27 yuan.

Another sector drawing favorable reviews from brokerages is cement.

Heading off overcapacity

Chinese authorities have intervened in that sector to stop runaway expansion and head off overcapacity. China has pledged to limit production capacity of cement to 2.1 billion tons in the next five years, which translates into almost no expansion.

China, the world's second largest economy, accounts for 7 percent of the world's gross domestic product but consumes about 58 percent of concrete used around the world every year, 47 percent of coal and 40 percent of copper.

Efforts to curb supplies of cement, coupled with rising coal prices and the need for more power to address electricity shortages, may be positive signs for investors.

Shenyin Wanguo is recommending investors take a look at Anhui Conch Cement Co, and coal producers China Shenhua and Yanzhou Coal Mining Co.

Conch shares have lost 11.2 percent this year, closing at 27.31 yuan yesterday. Shenhua added 17.8 percent to 29.65 yuan, while Yanzhou advanced 20.5 percent to 34.17 yuan.

CICC is also recommending companies with stable profit outlooks and low valuations, such as SAIC Motor Corp and Guangxi Liugong Machinery.

SAIC's net profit in the first quarter rose 56.5 percent, while Liugong reported a net profit growth of 57 percent from a year ago.

SAIC has gained 25.8 percent this year, closing at 18.89 yuan yesterday. Liugong is down 40.5 percent at 22.27 yuan.

Still the best advice is look before you leap.

CICC said investors need to determine whether valuations are reasonable and whether shares have already priced in the worst that could befall a company and are now oversold.

To Wang, the advice is sound as she considers her investment strategy for the second half.

"I'll pick shares that have had excessive declines," Wang said.

She said she might take a serious look at some newer listings on the ChiNext board. China's version of Nasdaq has been the hardest hit market so far this year.

"But I'll only consider those that have already fallen below their IPO prices and have price-to-earnings ratios around 20 to 30 times," she added.