Markets

Christopher Langner is a markets columnist for Bloomberg Gadfly. He previously covered corporate finance for Bloomberg News, and has written for Reuters/IFR, Forbes, the Wall Street Journal and Mergermarket.

Andy Mukherjee is a Bloomberg Gadfly columnist covering industrial companies and financial services. He previously was a columnist for Reuters Breakingviews. He has also worked for the Straits Times, ET NOW and Bloomberg News.

China is a screaming buy. Or, let's be specific: Nine out of 10 times an analyst rates a stock in the People's Republic, it's a buy. The caveat? If you'd listened to them over the past 12 months, you'd have lost money.

At least one brokerage, Emperor Capital Group, went as far as having a buy on every single stock it rated. That's just an extreme illustration of a more general problem. Unlike in mature markets such as the New York Stock Exchange, or even less-developed ones like Brazil's Bovespa, equity analysts in Shanghai and Shenzhen are overly gung-ho. So much so that there appears to be a big disconnect between their recommendations and those real-world problems that economists keep obsessing about, such as China's sudden growth slowdown and surging corporate debt.

Raging Bulls
More than 90 percent of analysts' recommendations on China-listed companies are buy
Source: Bloomberg

The bullishness cuts across asset classes. Ratings firms in China place 92 percent of the thousands of companies they evaluate in one of four highest brackets of creditworthiness. In the world of bonds, however, a rise in defaults has meant super speedy downgrades from AA+ to CCC. Yet stock analysts seem to care very little about being spectacularly wrong, and staying that way.

Wrong, and How
Analysts rate most Chinese stocks a "buy" despite a slump in those that missed their price targets
Source: Bloomberg
* Denotes a market-cap weighted index of 457 China-listed securities for which the most recent market price is lower than analysts' median 12-month target at the peak of the market in June last year.

Analysts in China often complain that their Western peers don't grasp the reality on the ground, which may not be as bad as the media paints it. But buy recommendations nine times out of 10 doesn't pass the smell test. It has to be wrong, in any market or economic environment.

The issue becomes more pressing as MSCI, which manages some of the best-tracked stock benchmarks in the world, gears up to decide next month whether to include Chinese-traded shares in its emerging-markets gauge. Recent regulatory changes have increased the odds of inclusion to 70 percent, Goldman Sachs says.

That means more people across the globe will have to at least take note of analysts' views from the nation, if not rely on them. If the only trick in their repertoire is "buy," that's going to prove a tedious show for investors, and also a rather unprofitable one.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

To contact the authors of this story:
Christopher Langner in Singapore at clangner@bloomberg.net
Andy Mukherjee in Singapore at amukherjee@bloomberg.net

To contact the editor responsible for this story:
Katrina Nicholas at knicholas2@bloomberg.net