Marketfield’s Shaoul Sees China Stock Rally Enduring

Chinese stocks, on pace for their best quarterly gain in a year, are still in the “early” stages of a rally, according to Marketfield Asset Management LLC’s Michael Shaoul.

Marketfield, which manages $18.5 billion, is bullish on Chinese equities amid optimism the government will take more steps to boost Asia’s biggest economy, Shaoul said. President Xi Jinping is trying to avoid a slowdown in output as he seeks to increase the contribution from services to growth, while reducing reliance on the credit-driven construction that has propelled expansion in the past.

“We would expect to see the government and the central bank bring in stimulus measures favoring state-owned enterprises, which is quite bullish,” Shaoul said by phone from New York on Aug. 20. “What they don’t seem to want to do is to re-stimulate real estate itself. You might even start to see retail money redirected to equities after years of chasing real estate.”

Stock gains have contrasted with housing prices, which last month fell the most since January 2011. UBS AG estimates that real estate accounts for more than a quarter of final demand in the economy. The slump, combined with a credit slowdown, adds to risks the nation will miss its 7.5 percent growth target this year.

Photographer: Michael Nagle/Bloomberg

Michael Shaoul, Chief Executive Officer of Marketfield Asset Management. Close

Michael Shaoul, Chief Executive Officer of Marketfield Asset Management.

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Photographer: Michael Nagle/Bloomberg

Michael Shaoul, Chief Executive Officer of Marketfield Asset Management.

‘Clean Breakout’

The Shanghai A-Share Stock Price Index (SHASHR), which has risen 9.4 percent this quarter to 2,345.83, will show a “clean long-term breakout” if it passes 2,500, while the Hang Seng Index (HSI) has room for further gains after reaching a six-year high last week, he said. The Bloomberg China-US Equity Index of the most-actively traded Chinese stocks in the U.S. advanced 0.5 percent to 116.15 last week and is up 9.6 percent since the end of June.

China’s benchmark Shanghai Composite Index slipped 0.5 percent to 2,229.27 in Hong Kong today.

Shaoul’s $18.5 billion Mainstay Marketfield Fund (MFLDX) has gained 78 percent on a total return basis since it was established in July 2007, compared with a 60 percent increase in the Standard & Poor’s 500 index, data compiled by Bloomberg show. The fund can bet on both rising and falling shares.

The money manager, who had been bearish on China since at least 2010, said his outlook changed in the second quarter after a four-year selloff pushed the Shanghai A-share gauge down 36 percent. The shift was part of a broader move back toward emerging markets that started with Brazil in March on prospects for improved demand for commodities, he said. He declined to name specific stocks Marketfield has been buying.

No Sellers

“As the economic news deteriorated this year it was notable that the equity market did not follow suit,” he said. “The rhetoric people used became more negative, but it appears that this came from people who had already sold their holdings. Bear markets generally finish because you run out of sellers.”

China’s new-home prices fell in July in almost all cities that the government tracks as tight mortgage lending deterred buyers even as local governments eased property curbs. The value of homes sold declined 28 percent last month, the biggest drop this year.

Aggregate financing was 273.1 billion yuan ($44.4 billion) in July, the least since the global financial crisis, data from the central bank showed on Aug. 13. The plunge in credit and slowdown in investment spending last month prompted speculation the government will act to revive growth, which picked up in the three months through June after decelerating in the prior two quarters.

Market Risk

While Shaoul sees further gains, Bank of America Corp.’s David Cui, the No. 1 ranked China strategist by Institutional Investor magazine, said July 14 that the stimulus sparking the rally makes stocks less appealing as leverage rises and free cash flow dwindles.

The Shanghai A-share index’s relative strength index was 67.2 on Aug. 22. It peaked at a five-year high of 81.7 on July 31. An RSI above 70 is a signal to some analysts that a security is poised to fall.

The nation’s sliding interest rates may suggest the People’s Bank of China is willing to move to encourage borrowing, according to Shaoul. The Shanghai Interbank Offered Rate for overnight lending which measures liquidity between banks, fell to a two-month low of 2.83 percent last week amid a three-week decline.

A Bloomberg index gauging the availability and cost of credit in Asian countries excluding Japan rose above zero this week for the first time since June 2013, when global interest rates surged on concern the Federal Reserve would taper monetary stimulus. A positive value indicates accommodative financial conditions, while a negative value indicates tighter credit.

“This is obviously an important development for emerging markets in particular, given that this metric is tied to swap spreads and equity valuations in China, Korea, India and Singapore,” Shaoul said in a note Aug. 19.

To contact the reporter on this story: Belinda Cao in New York at lcao4@bloomberg.net

To contact the editors responsible for this story: Nikolaj Gammeltoft at ngammeltoft@bloomberg.net; Richard Richtmyer at rrichtmyer@bloomberg.net Richard Richtmyer, Michael Patterson

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