The bull is back

Easier to watch in 2019

Bulls are auspicious in the financial world. But the animal at the Shanghai stock exchange – a copper sculpture – wasn’t regarded as much of an omen. The beast was dismissed for being too thin, with a lowered head that imparted a sense of listlessness, and local investors have blamed it for the long-term underperformance of their domestic market. So this month the Shanghai bourse shunted a replacement animal into place at the Shanghai International Finance Centre. Standing tall, with its chest bursting upwards and outwards, the new arrival is winning applause, with fresh hopes it will bring good luck to the market.

So perhaps it is no coincidence that Chinese shares are poised to become the world’s best performing equity class this year. The CSI300 index, which tracks the largest companies traded on the Shanghai and Shenzhen bourses by market value, has climbed 30% year-to-date. (Factoring in the weakness of the yuan, the country’s stock benchmark has still been up 28% this year in dollar terms.)

The rise – more than double that of Britain’s FTSE 100 or Japan’s Nikkei 225 indices – is a sharp contrast to its dismal performance last year, when the Shanghai Composite Index shed nearly a quarter of its value, with the onshore market as a whole losing Rmb13.2 trillion ($2.4 trillion). In fact, A-shares have been the world’s worst laggard for at least three out of the last five years.

Analysts generally attribute this year’s bull run to better corporate earnings and loosened liquidity in the banking system. Despite a slowing economy exacerbated by tariffs from the United States, A-share companies recorded 7.3% growth in net profit for the first three quarters. Supported by tax cuts, more than half are forecasting better annual results this year, with over 100 firms expecting to double their profits, Capital Week reports.

Many of the better performing stocks are concentrated in the consumer electronics and agriculture sectors, signalling dividends from an increasingly consumption-driven economy.

Another factor that is giving Chinese shares a boost is their increased weighting in the MSCI indices. The US benchmark compiler announced in March that it would quadruple the inclusion factor for Chinese stocks, bringing it to 20% of their market capitalisation. Following last week’s implementation of the final increment, A-shares will comprise 12.1% of the MSCI China Index and 4.1% of the MSCI Emerging Market Index starting from November 27. Moreover, 204 A-shares, of which 180 are mid-caps, will be added to the MSCI China Index.

The decision has buoyed northbound buying through the China-Hong Kong stock connect trading links for five consecutive months, partly due to the needs of mutual and index funds to rebalance their portfolios. Relatively low valuations for A-shares have also helped. Stocks on the Shanghai bourse are trading at almost 14 times earnings on average, versus 21 times for US stocks, and 16 times for Europeans.

Food and beverage firms are the most favoured selection, commanding 19% of northbound flows, followed by consumer electronics, pharmaceuticals and banks, which made up 10% of investment individually.

Analysts think that MSCI’s decision will spur other index providers to increase the representation of domestic Chinese stocks in their own benchmarks. FTSE Russell will begin including A-shares in its index for the first time (at an inclusion factor of 25%) next March, for instance. The trend should lift foreign holdings of A-shares to 10% or above within five to 10 years (up from the current 3%) as annual inflows hit Rmb200-400 billion, state-owned investment bank CICC estimates.

The positive sentiment has also prompted brisk activity in the IPO market. By the end of the third quarter 127 local companies had floated on the Shanghai and Shenzhen stock exchanges, raising Rmb140.1 billion. That was a 46% jump in the number of new listings on last year. Shanghai’s new STAR market has welcomed some of the debutants (see WiC461). Moreover Shenzhen’s own Nasdaq-like ChiNext board has just announced changes to listing rules that should bring more newcomers to market.

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