The mainland’s A-share market may have a strong upside next year if it makes it to the MSCI China and emerging markets indices.
Chinese authorities have been breeding a bull market to stem a hard landing given the country’s sluggish exports and internal consumption as well as a lackluster property sector.
As a result, the Shanghai Composite Index has soared nearly 50 percent in past five months after rebounding from a record low earlier this year. The benchmark closed at 3,032.61 on Tuesday.
However, the question is whether the bull market will sustain — and for how long. The A-share rally is being mainly driven by bullish domestic investors, while foreign investors continue to trim their bets on both A and H shares. Currently, a number of H shares are traded at a discount of 30 to 40 percent to their A counterparts, suggesting that global investors still hesitate to jump on the bandwagon.
A shares have shown signs of a typical bull cycle given the swelling growth and trading volume in the second half of the year. However, it could also mean that a significant correction might emerge on the horizon soon, which could bring valuations to attractive levels for foreign investors.
The inclusion of A shares in the MSCI may work in line with Beijng’s push to attract more global investors and hence bolster the renminbi’s internationalization.
More listed companies are set to raise funds on the stock market in the coming months. Lifting of non-tradable shares, increasing new share supply and share placements may take some heat out of the bullish market. I bet those firms that have issued share placements may outperform the benchmark in the months ahead.
And those H shares with substantial discount to A shares look most attractive if you buy the story of A-share internationalization. Investors can look at mainland banks, insurers and brokers, as well as leading plays with government support.
The first quarter of 2015 would be a critical period for foreign investors to reverse their cautious stance after reducing bets on A-share ETFs and shares of state-owned enterprises recently.
It would be better for investors to draw up a timeline for beneficial government policies to guide them on the best time to place their bets as the impact of new policies will not reflected on business performance immediately.
For example, a number of power generators led the market rally on Monday. These included Huaneng Power International Inc. (00902.HK), Huadian Power International Co. (01071.HK), China Power International Development Ltd. (02380.HK) and Datang International Power Generation (00991.HK).
Relevant stocks in healthcare, free-trade zone, taxation reform, new energy, urbanization, technology upgrade, infrastructure, high-speed railway and financial reform could bring impressive short-term returns if the government unveils its reform plans.
Also, prudent investors may place a bet on China Mobile (00941.HK) on the back of its strong financials and excellent 4G performance, as well as Ping An Insurance Group Co. of China Ltd. (02318.HK), which recently issued a share placement. Other mainland banks and insurers are also attractive in the near term.
Translation by Julie Zhu.
This article appeared in the Wednesday edition of the Hong Kong Economic Journal.
– Contact us at [email protected]