- Government efforts to prop up equities seen as futile
- Stock valuations still highest among major markets after rout
How do you get a bottom-up stock picker, a chart watcher and an economist to agree? Try asking them about Chinese equities.
Mark Mobius, Tom DeMark and George Magnus -- world-renowned forecasters who view markets through three very different lenses -- are all finding common ground with their predictions that Chinese shares have further to drop. They say government efforts to prop up the $5.1 trillion market are futile, a view that’s gaining traction among analysts after an unprecedented two-month rescue effort failed to spark a sustained rally.
“I’d expect the government to be reducing intervention,” Mobius, the Franklin Resources Inc. money manager who’s been investing in emerging markets for more than four decades, said in an interview in Hong Kong on Friday. “They realize it’s not working.”
Authorities may be more receptive to declining share prices now that the country’s World War II victory parade -- seen as a platform for President Xi Jinping to project China’s strength on the world stage -- has passed without incident. Mainland exchanges, shut since Sept. 2 for national holidays to celebrate the war anniversary, reopened today facing a range of indicators that suggest investors see more declines.
The Shanghai Composite Index sank 2.5 percent to 3,080.42 at the close on Monday, led by the nation’s biggest companies on speculation state-backed funds had stopped buying. The benchmark gauge will probably drop to 2,590 before prices bottom out, DeMark, who has spent more than 40 years developing indicators to identify market turning points, said in an interview on Aug. 31. Magnus, a senior independent economic adviser to UBS Group AG, says the government needs to allow the gauge to slump to between 2,500 and 2,800.
“China should have seen how futile their intervention is,” said Cedric Ma, a Hong Kong-based senior investment strategist at Convoy Asset Management Ltd. “The government will let the markets continue to correct.”
Traders are positioning for further downside in the options market, where bearish contracts on the mainland-listed China 50 ETF climbed to the most expensive level on record versus bullish ones last week. In the U.S., an ETF designed to make money when Chinese shares fall has recorded a 60-fold surge in assets since June.
Foreign money managers have sold Shanghai equities through the city’s cross-border exchange link for four straight days, bringing outflows since July 3 to $4.9 billion. Valuation gaps between dual-listed shares are approaching the widest levels since 2009, a sign that international investors in Hong Kong are even more pessimistic than their mainland counterparts.
“The China market is still viewed as over-valued,” said Andrew Sullivan, the head of sales trading at Haitong International Securities Group Ltd. in Hong Kong. “Because of the government intervention, it hasn’t had a real clear-out.”
Chinese authorities intervened in the stock market on Aug. 27 to stabilize prices before the Sept. 3 military parade, according to people familiar with the matter. Signs of support persisted through last week as large-capitalization companies -- favored targets of state-linked funds -- rallied toward the end of each trading session.
The Shanghai Composite still ended last week with a 2.2 percent drop. The Hang Seng China Enterprises Index of Hong Kong-listed shares retreated 6 percent, while the Bloomberg China-US Equity Index slid 8 percent.
Even if the government pares back direct intervention, it still has plenty of market-friendly ways to support the broader economy, according to Bruce Yu, a money manager at Franklin Templeton SinoAm in Taipei. Policy makers may increase fiscal spending and push ahead with plans to make state-owned enterprises more efficient, he said.
Japan’s experience in the 1960s shows state support measures can work, according to Paul Sheard, chief global economist at Standard & Poor’s in New York. Japanese authorities helped set up rescue funds to buy equities after a big selloff in 1963. Shares ultimately rebounded and economic development continued.
China’s intervention prevented systemic risk and stopped the free-fall in equities, central bank Governor Zhou Xiaochuan said in a statement Saturday after a meeting by finance ministers and central bankers from the Group of 20 nations. Declines in shares are almost over and financial markets are expected to be more stable, he said.
For Alex Wong, a Hong Kong-based asset-management director at Ample Capital Ltd., Chinese stocks are still too expensive to lure non-state investors.
Equities on mainland bourses traded at a median 45 times reported earnings last week. That’s the highest among the 10 largest markets and more than twice the 18 multiple for the Standard & Poor’s 500 Index. The Shanghai Composite, where low-priced banks have some of the biggest weightings, has a ratio of 16.
“It wouldn’t be surprising to see another 5 to 10 percent fall during big volatility this week,” Wong said. The government “can’t buy stocks forever,” he said.