22 October 2016
With valuations of many bluechips already at low levels, observers see limited downside for China's A-share markets in the near term. Photo: CNSA
With valuations of many bluechips already at low levels, observers see limited downside for China's A-share markets in the near term. Photo: CNSA

Can China’s A-shares stage a comeback this summer?

China’s A-share market remains weak as investor sentiment continues to be fragile, leading to a drop in trading activity.

As the “Sell in May” mood is likely to spill over to June, we come to this question: Can the market manage a quick rebound in July?

The saying “Sell in May and go away”, which first made its appearance in the Financial Times in 1964, refers to the belief that equity markets tend to suffer a seasonal decline in May every year.

Now, let us examine the performance of the Chinese markets over the past decade.

The Shanghai Composite Index posted six rises and six declines in May between 2004 and 2015, according to data from the Securities Times. The six declines were all less than 10 percent, with the biggest drop — 9.7 percent — happening in May 2010.

However, the benchmark posted three straight rallies in May between 2012 and 2014, notching gains of 3.83 percent, 0.63 percent and 5.63 percent respectively.

In the month of June, the Shanghai market posted 7 declines and 5 rises over the last 12 years. There were three declines of over 10 percent — a 20.3 percent slump in 2008, 13.97 percent fall in 2013 and 10.07 percent loss in 2004.

In 2015, the index slid by 7.25 percent in June. 

“Sell in May and go away” is followed by “remember to come back in September”. 

Statistics show that the accumulative return would hit over 200 percentage points if investors follow the rule. What is the underlying logic?

In China, key national conferences and annual and quarterly corporate earnings reports are all done with by May. 

While the market may not take off in June, it is also unlikely to collapse.

Global risk events like Brexit could heighten market volatility, but Chinese bourses will not go into crisis mode like what we saw in January.

Lock-up period on some private placements will expire in June, leading to some selling pressure.

However, the market’s downside will be limited as state-linked financial institutions and funds will provide crucial support.

Also, we should bear in mind that valuations of many bluechip firms are already at low levels.

In addition, the expected launch of the Shenzhen-Hong Kong Stock Connect program and the anticipated inclusion of A-shares into a key MSCI index would lend support for Chinese stocks.

The market performance in July will be largely dependent on the trend in June.

There are several things weighing on the minds of global investors. Among them: How far will Beijing succeed in stimulating domestic consumption? And can it push economic structural reforms without suffering too much pain?

Restoring market confidence in the medium and long term is critical.

I believe the mainland’s markets will remain volatile in July, but certain sectors and companies will benefit from earnings growth or attractive valuations.

Investors should bet on industry leaders with good management, strong cash-flow and R&D and product upgrade capability.

This article appeared in the Hong Kong Economic Journal on May 30.

Translation by Julie Zhu

[Chinese version 中文版]

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Senior investment banker

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