Chinese stocks are poised to extend their slump as the slowing economy hurts earnings, according to Bank Julius Baer & Co., which has about $286 billion in client assets worldwide.
Chinese equities will probably retreat unless there is “significant” easing of monetary policy, Alan Lam, a Hong Kong-based analyst at Julius Baer, said by phone yesterday. His comments came after the Shanghai Composite Index fell 2.7 percent, the most in four months, as Societe Generale SA said Chinese corporate profits won’t grow at all this year. The gauge has gained 3.9 percent this year, headed for the biggest quarterly gain in four.
“In the coming three months, the rally has ended,” Lam said. “The economic slowdown will continue for a while and there are overexpectations on policy. It’s a fact that the economic slowdown in China is negative on profitability.”
The Shanghai Composite sank 7.9 percent since March 5 after Premier Wen Jiabao announced a 2012 economic growth target of 7.5 percent, down from 8 percent over the past seven years. The gauge has slumped 7.3 percent this month after rallying 10 percent in January and February. The Hang Seng China Enterprises Index of Hong Kong-listed Chinese stocks has tumbled 11 percent in March, the second-biggest drop among 93 primary indexes tracked by Bloomberg.
The Shanghai Composite fell 1.4 percent today to the lowest level since Jan. 16. The Hang Seng gauge declined 1.6 percent, the biggest drop since March 19.
‘Far Too Optimistic’
Industrial companies posted their first January-February profit decline since 2009, with net income dropping 5.2 percent compared with a 34.3 percent gain a year earlier, the National Bureau of Statistics reported on March 27. Companies from Air China Ltd., the nation’s biggest international carrier, to Jiangxi Copper Co., the largest producer of the metal, reported earnings this week that trailed analysts’ estimates.
The industrial profit figures suggest 2012 consensus earnings estimates for Hong Kong-listed Chinese companies are “far too optimistic,” Guy Stear and Anthony Lee, strategists at Societe Generale, wrote in a March 27 report. John-Paul Smith, Deutsche Bank AG’s London-based emerging-market strategist, said “recent corporate data appears to support our bearish case.”
“At the very least we are at the start of a transition or consolidation period for both the economy and the corporate sector, which is likely to focus investor attention on the deteriorating outlook for profits and cash flow,” Smith wrote in an e-mail yesterday. The strategist cut Chinese stocks to underweight from neutral last month.
Time To Buy
Of the 505 companies in the Shanghai Composite that have released annual earnings, profits have risen 17 percent on average, trailing analyst estimates by 3.6 percent, according to data compiled by Bloomberg. That compares with an increase of 38 percent in the previous year.
The Shanghai Composite was the worst performer among the world’s 10 biggest markets in 2010 and 2011, tumbling a combined 33 percent, as the central bank increased interest rates and lenders’ reserve-requirement ratios to tame inflation.
The sell-off in equities may be a good time to buy as the government has room to cut rates and reserve ratios to avoid a “hard landing” for the economy, said Saharat Chudsuwan, chief investment officer at Bangkok-based Tisco Asset Management Co., which manages about $4.6 billion including Chinese equities.
Companies in the Shanghai Composite trade at 9.4 times estimated profit, compared with a record low of 8.9 times on Jan. 6, weekly data compiled by Bloomberg showed. The Shanghai gauge trades at a 30 percent discount to the Standard & Poor’s 500 Index’s 13.5 times, the data show.
Stocks dropped across Asia yesterday on concern slumping earnings will be the latest drag on a Chinese economy that’s already facing risks from a European debt crisis that’s eroding demand for exports and Premier Wen’s campaign to rein in home prices. The MSCI Asia Pacific Index slumped 0.9 percent today, extending yesterday’s 0.5 percent drop.
“A lot of Asian economies are intertwined with China,” Bharat Joshi, who helps oversee $10 billion as an assistant investment manager at Aberdeen Asset in Kuala Lumpur, said in a phone interview yesterday. “Everyone is quite dependent on the big brother there. When China reports bad numbers and disappointments in the market, it affects the region.”