Chinese stocks have put in an anemic performance so far this year, despite the nation's strong economic recovery, and one group of analysts say investors may have to wait until March for a significant upturn.
Part of the problem are upcoming data releases, which will likely continue to feed worries about further policy tighteningto prevent the economy from overheating, according to Macquarie Group Asia strategist Michael Kurtz and analyst Shirley Zhao.
Kurtz and Zhao said that, timing-wise, it may not be until the Chinese Communist Party's annual National People's Congress in March that investors may again begin to grow comfortable with Beijing's policy outlook.
By then, most Chinese companies will have released their 2009 corporate earnings, which the analysts said will likely be strong and could provide an additional trigger for market gains.
"China's next couple of months of data may continue playing directly into the 'sell inflation/buy exports' trade ... as base-effect distortions from a bombed-out first quarter of 2009 substantially elevate the 2010 [year-on-year comparison] readings on both China's headline inflation and exports," they said.
China released January trade data Wednesday showing a narrowing of the trade surplus, though analysts said the monthly figures for January and February are hard to read due to distortions from the Chinese New Year holiday.
Meanwhile, the Macquarie analysts also cited data on money flows from China-dedicated long-only fundsas showing that they have pulled out some 20% of their total net subscriptions last year, in "a liquidation so large as to seem itself unsustainable."
The Shanghai Composite now is among the worst performing benchmark indexes in Asia so far this year, having lost about 9.5%. In Wednesday's morning trading, the index was at 2,967.03, up 0.6% from the previous close.
The Hang Seng China Enterprises Index, a benchmark tracking performance of large-capital Chinese shares listed in Hong Kong, has even sharper losses under its belt, having dropped 12.5%, while Hong Kong's benchmark Hang Seng Index has given up around 9% so far in 2010.
The Hang Seng was flat at 19,782.88 in Wednesday's morning session, while the HSCEI rose 0.5%.
Even shares of commodity producers in Australia and exporters in Japan, Taiwan and South Korea have all performed weakly in recent weeks due mainly to worries about Chinese policy tightening, given that China is a major importer of raw materials and is increasingly a major buyer of consumer goods.
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The Macquarie analysts listed Hong Kong-traded Chinese shares, better known as H-shares, as attractive bets.
"In addition to value, dividend yield has become increasingly attractive, as markets remain choppy and indecisive," they said.
Among H-shares, they said Bank of China Ltd., China Shenhua Energy Co., Aluminum Corp. of China, China Petroleum & Chemical Corp., Nine Dragons Paper Holdings and Weichai Power Co. were stocks trading at a sharp discount to their historic valuations after the recent correction.
Macquarie also named China Southern Airlines Co. as a stock likely to benefit from a potential yuan appreciation, and rated China Telecom Corp. as a "value play."
Industrialized nations have been mounting pressure on China to let the yuan appreciate against major currencies. Chinese authorities have kept the local currency in a very tight range around 6.82 yuan to a U.S. dollar for more than a year.
My take:
Chinese policy makers intention is pretty clear but market will only settle down after the central sit down for their annual meeting march to put everything down in black and white. In any case, I believe that March is a reasonable time frame, as by then most of the news out there should have been absorbed by the market.
Also by then, we should have a clearer picture of at least 1H10 for the US market, and hopefully a good strong resolution for the European sovereign debt issue.
Until then, market will remain volatile with volume staying thin. Genuine buying interest are still thin, and this will keep the market choppy.
However, if you do see March as a good time for stock, then perhaps February after CNY, is a good time for some bargain hunting.
This blog is a selections of my investment views to my client. If you find it useful or have additional information to share, please do let me know. These blogs are my personal views and is not meant to solicit any sales or investment on any securities or investment. I may have vested interest in some of the counters or investment products, hence please invest at your own risk. As usual invest in what you understand and do your own homework as usual.
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