Reuters: Regulatory News: Stars align for a long-awaited China stocks bounce

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Stars align for a long-awaited China stocks bounce May 9th 2012, 22:25 Wed May 9, 2012 6:25pm EDT * China stock market near 2012 highs while others wane * The rally comes after two really bad years * Market reforms, IPOs help volumes spike * Company earnings and margins remain a worry * Power, oil, building materials sectors may find favour By Vikram Subhedar HONG KONG, May 10 (Reuters) - Leave it to China to defy a popularly held adage. While a "sell in May" phenomenon took hold across markets this week after French and Greek polls fed fears about Europe's debt crisis and U.S. jobs data signalled a weak recovery, Chinese equities remain within touching distance of 2012 highs. Going long China stocks has been the "pain trade" for the past two years as worries over bad debts in the country's huge banking system, a clampdown on its red-hot property sector and corporate governance fears have tripped up those that dared to be bullish. But a steady dose of market reform announcements from Chinese authorities, abetted by a pick-up in IPOs and Europe's growing unattractiveness as an investment destination suggest now is as good time as any to position for at least a short-term bounce in China stocks. Sentiment has also been helped by growing expectations that the economy will avoid a much-feared "hard-landing" on the back of signs that manufacturing is bottoming out, as well as by a brighter outlook on the charts for benchmark indices. Indeed, more brokerages are shifting to overweight positions and some think China may be the best long bet among Asian equity markets. "We think signs of stabilisation in China are emerging. We expect this to be more apparent over the coming months and think this equity market looks best given valuations underperformance and economic stabilisation," wrote the UBS equity strategy team, which made China its biggest overweight market last month. Trading volumes have spiked, with the Shanghai Composite close to 2012 highs and the large-cap focused CSI300 hitting 2012 highs this week - a continuance of a healthy outperformance last month when the Shanghai Composite climbed 6 percent and the CSI300 rose 7 percent. Although these markets are largely dominated by domestic investors due to government restrictions, foreigners are also buying, lifting their Chinese stocks holdings by 6 percent in the first three months of this year, according to China's Securities Times. The rally seems to bear out predictions made in a Reuters poll late in March that Shanghai stocks could rise to around 2,725 by the year end, which would be up 24 percent from a year earlier and 13 percent above current levels. The bounce has also been a long time coming. Chinese shares in Hong Kong and Shanghai lost over a fifth of their value in 2011 compared with a 7.6 percent drop for the MSCI World index . For Shanghai markets, that followed a 14 percent drop in 2010, a largely positive year for equities during which emerging markets outpaced their developed peers. FLURRY OF REFORMS Exciting investors most is a spate of reforms spearheaded by Guo Shuqing, a former foreign exchange regulator who took over as chairman of the country's market watchdog last November. Authorities have announced lower transaction fees for China's two main bourses, new IPO pricing rules, proposals to clean up delisting procedures and an expansion in quotas for foreign institutional money investing in the country. These reforms will protect investors, make the market deeper and better regulate the securities industry, says Bank of America Merrill Lynch's David Cui, whose team topped the China research rankings in the latest Institutional Investor Survey. "The goal is to make the market allocate savings better to support the real economy and reduce financial system risk," he said. IPOs too are perking up after a slow start this year, with three deals worth a combined $3.1 billion added to the pipeline in the past week. For A-shares in Shanghai, the 20-day average daily volume has risen to about 10 million, doubling from the start of the year, and up from about 8 million in mid-April. Chartwise, both the Shanghai Composite and CSI300 have moved above their 200-day moving average and CLSA's technical analyst Laurence Balanco highlights the CSI300 as a notable exception to the brokerage's call for global equity market weakness through the summer. That break above its 200-day moving average opens the way for a further 17 percent climb from current levels, he said. SECTOR PICKS Not that there aren't risks - not least of which are deteriorating earnings and margins at Chinese companies, which analysts say will be a long-term concern. During the 2011 earnings season, nearly three-fourths of Chinese companies reported earnings that fell short of expectations. Even so, that in itself is not enough reason to be pessimistic, says Hong Kong-based Arthur Kwong, head of Asia Pacific equities at BNP Investment Partners, who last week moved to an overweight position on Chinese equities. "I think a lot of the earnings slowdown is reflected in stock prices and some good names were sold off with the bad after the numbers," he said. Kwong prefers to stick with sectors which can protect margins or even expand them, and includes among his top picks independent power producers that stand to benefit from falling coal prices and oil refiners which are set to gain from fuel pricing reform. For the short-term, analysts at UBS and Goldman Sachs recommend the building materials sector on expectations that oversold cement and steel stocks can rebound on signs that demand is stabilising. Link this Share this Digg this Email Reprints

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