27 March 2019
Beijing is putting emphasis on market stability, and as such, it wants a well-supported bull market. Photo: Bloomberg
Beijing is putting emphasis on market stability, and as such, it wants a well-supported bull market. Photo: Bloomberg

Beware of A-share market correction

China’s A-share market may face downward correction risk in the short term given that authorities are looking for a well-supported bull market instead of a relentless crazy bull, which goes against the government guideline of “stability”, as hinted in the latest commentary published by the Xinhua News Agency.

Also, the market bull may take a pause given that 654 firms have filed applications for an initial public offering (IPO), which would drain massive capital out of the market. Other listed firms would also step up capital raising given the bullish market sentiment.

The Hang Seng Index may be rangebound between 23,800 and 25,000, considering that H shares have been sought by some investors as a hedge against foreign exchange volatility amid the strong US dollar.

As global investors continue to stay way from A shares, private and hedge funds are focusing on short-term return, which has led to certain sectors being chased by enormous capital. And the divergence between different sectors has become more obvious.

Currently, investors favor mainland banks, insurance, brokerage, high-speed railway, infrastructure and even property plays. Meanwhile, Macau gaming, new technology, energy, consumer and export-related sectors have fallen out of favor.

The sharp rally of those crowded sectors may be short-lived as they are already overbought, and some smart money may take profit in advance.

Mainland property plays have shown impressive gains recently. The property market has seen improving sales after local governments removed home purchase restrictions. Their valuation is also attractive, with a P/E ratio of six times and P/B ratio below 1.

However, investors should take note that Beijing’s priority is to stabilize the property market, not to produce bubbles. As such, investors should only take some short-term bets on the sector. 

They should pay more attention to oversold sectors, which may stage a quick rebound amid certain policy incentives. In fact, a number of US ADRs in the so-called new economy, including Baidu and Alibaba, which may be included in the MSCI, look very attractive.

During this visit to Shenzhen, Premier Li Keqiang said a stock market link between the city and Hong Kong is on the cards. His remarks highlight the fact that Beijing is eager to lure global investors into the A-share market and pave the way for the full convertibility of the Chinese currency.

Currently, the Shanghai-Hong Kong Stock Connect is acting as a catalyst for the A-share market rally, but the price gap of dual-listed stocks is set to narrow. That means H shares with large discount to their A-share peers may offer good buying opportunity.

Also, the price difference between shares listed both in Shenzhen and Hong Kong may also narrow, thereby triggering further speculation on a number of related plays, such as Zhejiang Shibao Co. (01057.HK), Shandong Molong Petroleum Machinery Co. (00568.HK), Northeast Electric Development Co. (00042.HK), Jingwei Textile Machinery (00350.HK), Shandong Xinhua Pharmaceutical (00719.HK), Shandong Chenming Paper Holdings (01812.HK), Hisense Kelon Electrical Holdings (00921.HK), Zoomlion Heavy Industry Science and Technology (01157.HK), China International Marine Containers (Group) (02039.HK) and Dongjiang Environmental (00895.HK).

Translation by Julie Zhu

This article appeared in the Hong Kong Economic Journal on Tuesday. 

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columnist at the Hong Kong Economic Journal

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