China’s stocks are poised to extend losses after erasing this year’s gains amid concerns over a slowing economy, according to the only strategist who forecast declines for Chinese shares in 2012.
The economy probably expanded at a “subpar” rate in the second quarter and investors should buy shares of companies such as consumer-staples producers, whose earnings may be sheltered from the slowdown, Hao Hong, head of Chinese research at Bank of Communications Co. in Hong Kong, said by e-mail yesterday, declining to name stocks. The Shanghai Composite Index may fall “briefly” below 2,000 in a worse-case scenario, he said.
The gauge is down 0.2 percent this year after losing 1 percent yesterday to 2,195.84, the lowest level since Jan. 6. It tumbled 7.4 percent in June, the second-worst performance of 95 major indexes tracked by Bloomberg, as lower-than-estimated industrial output and retail sales data overshadowed the central bank’s first interest-rate cut since 2008.
“The market is collapsing,” said Hong, who was previously a global equity strategist at China International Capital Corp. “I am again waiting for a capitulation like the one in January.”
The Shanghai Composite (SHCOMP) sank to a three-year low on Jan. 5 before rallying 15 percent through March 2 amid speculation the government would ease monetary policy to bolster an economy that grew by the slowest pace in almost three years in the first quarter. The People’s Bank of China cut lending and deposit rates by a quarter percentage point on June 8 and has lowered banks’ reserve ratios three times since November.
Hong was the only strategist among 13 brokerages surveyed by Bloomberg at the start of the year who forecast declines for Chinese stocks in 2012. At CICC, he accurately predicted a slump for the Shanghai Composite in 2010 and turned cautious on equities in April 2011 as Goldman Sachs Group Inc. and HSBC Holdings Plc recommended buying more shares. The Shanghai gauge fell a combined 33 percent in 2010 and 2011.
Hong joins Yu Guang of Invesco Great Wall Fund Management Co., China’s best-performing fund manager this year, in foreseeing faltering growth. The economy will probably stay in the “doldrums” in coming months, preventing a second-half rally for equities, Yu said in a June 21 interview. Yu’s Core Competitiveness Fund returned 25 percent this year, ranking it first among 714 China-based mutual funds, according to data compiled by Bloomberg as of June 25.
China’s economy grew 8.1 percent in the three months to March 30, the least since the second quarter of 2009, as the slowing global economy dragged on the nation’s exports. Europe’s debt crisis has hurt the outlook for China’s shipments to its biggest trading partner. Premier Wen Jiabao announced on March 5 a growth target of 7.5 percent for this year, down from an 8 percent goal in place since 2005.
Second-quarter gross domestic product figures are scheduled for release on July 13. Daiwa Securities Group Inc., Japan’s second-largest brokerage, lowered on June 27 its forecast for growth in the period to 7.8 percent from 8.2 percent. That rate would be the slowest since the first quarter of 2009, according to data compiled by Bloomberg.
“Second-quarter growth is likely to be subpar,” Hong said. “Besides Europe, people were hoping for a V-shape cyclical recovery. But now things are not what they seem.”
Market liquidity remains tight while “a large portion” of new loan growth is being conducted through bank discounted notes and bills in a sign that companies are borrowing for working capital rather than investment, he said.
The seven-day repurchase rate, a gauge of funding availability in the financial system, increased 53 basis points this quarter, after declining 215 basis points in the first three months of the year.
The Shanghai Composite’s valuation dropped to 9.6 times estimated profit yesterday, the lowest level since March 29, data compiled by Bloomberg show. The MSCI BRIC Index, which measures equities in the largest emerging markets of Brazil, Russia, India and China, is valued at 8.3 times profit.
“The market will likely make a new low,” Hong said.
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