China H Share Euphoria Enters New Stage as Laggards Surge
Comment of the Day

January 29 2018

Commentary by Eoin Treacy

China H Share Euphoria Enters New Stage as Laggards Surge

This article by Sofia Horta e Costa for Bloomberg may be of interest to subscribers. Here is a section:

As a bull market in the China H-share gauge extends into the 715th day, one of the longest in its 23-year history, investors are finding plenty of reasons to buy and few to sell.

While technical measures suggest a pullback is overdue, growing confidence around China’s economy and earnings will support the gains for now, according to JPMorgan Asset Management’s Marcella Chow.

“It’s been a very rapid rally but only a change in fundamentals will trigger a correction and people are still quite confident,” said Chow, a Hong Kong-based global market strategist for JPMorgan Asset Management, which oversees $2 trillion worldwide. "It’s all about finding bargains.”

In such a market, any decline is seen as an opportunity to buy. When the gauge finally snapped a record 19-day winning streak on Thursday with a 1.7 percent retreat, it rebounded 2.5 percent the next day as investors pounced on the biggest losers such as banks. At the same time, persistent favorites such as China Vanke Co. and Ping An Insurance (Group) Co. show no signs of slowing down.

As a perennial underperformer itself, due to the index’s dominance by sprawling state-owned enterprises, there’s little for investors to worry about in terms of valuations. Even after an 85 percent bull run, the Hang Seng China Enterprises trades at 8.9 times its members’ projected earnings. That’s a 39 percent discount to the tech-heavy MSCI China Index, while a gauge of global equities is about twice as expensive.

Eoin Treacy's view

The China Enterprises Index (H-Shares) has been trading at a discount to its international peers for years. However, it is the return to synchronised global economic expansion in 2017 that reignited the hunt for bargains amid valuations on Wall Street that are expensive by historical measures. At the same time, the Chinese government has been slowly but surely raising obstacles to the continued growth of the shadow banking system while the consumer economy continues to expand rapidly.

The Index is now testing the psychological 14000 level which has offered resistance on a number of occasions since 2008. Even in the most benign scenario a lot of good news has been priced in over the last six weeks and some consolidation is looking overdue. 

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