19 February 2019
Selling by investors has dragged down the H-share index by 37 percent from this year’s high in May. Photo: Bloomberg
Selling by investors has dragged down the H-share index by 37 percent from this year’s high in May. Photo: Bloomberg

Bulls rue China exposure as H-share index sinks

Analysts are downgrading their forecasts and valuations for Hong Kong-listed China stocks, after they tumbled from their highest levels since 2008.

The Hang Seng China Enterprises Index, a gauge of so-called H shares, is now falling at the fastest pace among global peers.

The decline was triggered by China’s weak economic growth and an anti-graft campaign that led to the disappearance or arrest of some of China’s most high-profile corporate executives, Bloomberg reported.

“I was fooled,” said Hao Hong, the chief China strategist at Bocom International Holdings Co. in Hong Kong. “Cheap is not enough.”

While Hong was one of the few analysts to call both the start and peak of this year’s boom in domestic Chinese shares, his forecast for gains in Hong Kong-listed equities proved too optimistic.

Hong now says the H-share index will be stuck in a trading range.

His downbeat sentiment is shared by many of his peers. Societe Generale SA, which predicted in March that the Hang Seng China index would rally 17 percent by year-end, says the gauge will be flat in 2016.

Goldman Sachs Group Inc. downgraded its outlook for Chinese shares to marketweight from overweight in a report this month.

Selling by investors has dragged down the H-share index by 37 percent from this year’s high in May, the steepest drop among equity gauges in the world’s 50 biggest markets.

It now trades at 6.9 times earnings, lower than every benchmark index apart from Zambia, the southern African country facing a economic crisis, and Laos, which only has four listed equities.

The Hang Seng China gauge is valued at the biggest discount versus the MSCI All-Country World Index since 2003, according to data compiled by Bloomberg.

Depressed valuations are luring bargain hunters from across the border. Mainland investors have been net buyers of Hong Kong stocks through the city’s exchange link since Nov. 27, while technical indicators suggest a rebound is overdue.

The Hang Seng China gauge’s relative strength index was 28 on Monday, below the 30 level that some traders use as a signal to buy.

Not all Chinese stocks listed in Hong Kong are doing badly. Investors have flocked to companies seen as beneficiaries of President Xi Jinping’s attempts to transform the drivers of China’s economy from investment to consumption and services.

Tencent Holdings Ltd., operator of the WeChat messenging service, and BYD Co., a maker of electric cars, are among so-called new economy companies that have rallied more than 30 percent in 2015.

Bulls took solace from data on Saturday showing unexpected strength in China’s old growth drivers and renewed vigor in the new ones.

Industrial output climbed 6.2 percent in November from a year earlier, compared with the 5.7 percent median estimate in a Bloomberg survey, while retail sales gained 11.2 percent for the best reading of 2015.

While there is some evidence of economic stabilization, China’s slowdown is likely to continue through the first half of 2016, according to Francis Cheung, a senior strategist at CLSA Ltd. who turned negative on Chinese stocks in June.

Growth will probably weaken to 6.4 percent next year from a decade average of 10 percent, according to Goldman Sachs.

“The only way that H shares can perform is if there’s better momentum in the economy,” Cheung said in a Dec. 10 conference call in Hong Kong. “The economy is not going to stabilize in 2016.”

Concern that the government’s crackdown on graft will ensnare more corporate executives is also turning investors away, said Alex Wong, a Hong Kong-based asset management director at Ample Capital Ltd.

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