BlackRock: Market turmoil not an economic issue

July 15, 2015 11:09
Margin lending accounts for just 6-7 percent of the capitalization of the A-share market, according to BlackRock. It becomes insignificant when compared with the size of the economy. Photo: HKEJ

The current volatility in Chinese stocks is more of a market issue than an economic one because of its limited impact on the real economy, an equity strategist said.

Although many are worried about margin lending, its estimated value is only about 300 billion yuan (US$48.34 billion ) to 400 billion yuan, or 6-7 percent of the capitalization of the A-share market, Chris Hall, co-head of Asian equity research of BlackRock, told a press briefing in Hong Kong Tuesday. 

The amount becomes "quite small" when compared with the overall economy, he said.

Ewen Cameron Watt, BlackRock global chief investment strategist, said it's hard to anticipate the end of the market correction, despite a rally that began last Thursday.

He said Shanghai's benchmark index had more than doubled before the sell-off which wiped out about 30 percent of its value.

In its second-half investment outlook report, BlackRock said it prefers Hong Kong-listed Chinese equities, or H shares.

Hall said Asian (ex Japan) equities “are on the cusp of a long run higher, based on good value, easing financial conditions and reform momentum to liberalized economies such as India and China”.

He said the forecast is unlikely to be affected by any more delay in the inclusion of A shares in the MSCI index as a result of market turmoil.

The potential benefit of a US$50 billion inflow to the Chinese equity market after the MSCI inclusion is not very significant compared with the size of the market.

In addition, the BlackRock outlook report said that with US monetary policy turning, fundamentals such as productivity and earnings growth are poised to regain prominence as drivers of investment return.

Overall, equities are reasonably valued relative to bonds, ahead of the Fed rate hike expected in autumn, the BlackRock report said.

The rate hike would impact mostly US dollar dividend-paying, low-volatility sectors such as utilities, real estate investment trusts and consumer staples.

Meanwhile, banks and cyclical plays tied to consumer discretionary spending and technology would benefit from a rate increase.

BlackRock backs equities in Japan (financials and exporters), Europe (particularly banks) and emerging markets with reform momentum or monetary easing, particularly Asia.

The Fed is expected to increase short-term rates in September while the Bank of England is could follow suit in November or February 2016.

However, monetary policy will remain loose in many parts of the world including Europe, Japan and China, BlackRock said.

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EJ Insight reporter