UBS AG (UBSN) says China’s benchmark stock index, this year’s worst performer in the largest emerging markets, will jump as much as 20 percent by year-end, while Haitong Securities Co. expects the measure to keep tumbling as economic growth slows.
At least one more interest-rate cut by Chinese policy makers in the third quarter will help the Shanghai Composite (SHCOMP) Index rebound from a 13 percent drop since early March, Chen Li, UBS’s head of China equity strategy, said in an Aug. 3 interview. Chen Ruiming, an equity strategist at Haitong Securities, China’s second-biggest brokerage by market value, said he expects the Shanghai Composite to fall below 2,000 this year, or another 6 percent, as exports slump and government measures to curb property prices hurt the industry.
“We are cautious on the market and there won’t be too many investment opportunities this year,” Haitong’s Chen said in an Aug. 1 interview in Shanghai. “China’s decade-old growth model, led by exports and the property market, is having a big change and I don’t see a bottom for the economy this year.”
The divergent views underscore the challenge China faces in convincing investors its policies will help stem a slowdown in the world’s second-largest economy. The Shanghai Composite is trailing benchmark stock measures in Brazil, India and Russia the past three months and has dropped 2 percent this year.
China’s benchmark index jumped 1 percent to 2,154.92 at the close today, the biggest advance Since June 29. The measure rose last week for its first gain in seven after regulators reduced transaction fees on share trading by 20 percent to help revive demand for equities. Chen at UBS, Switzerland’s largest bank, is recommending investors buy machinery makers and property developers on prospects the economy will start to rebound.
“Growth will bottom in the third quarter,” he said in an Aug. 3 interview at his office in Shanghai. “We expect 15-20 percent upside for stocks.”
Chinese stocks have tumbled this year as the economy grew 7.6 percent in the second quarter, the slowest pace since 2009. The People’s Bank of China cut interest rates twice since early June and lowered lenders’ reserve requirement ratios three times starting in November as part of the government’s efforts to spur credit growth and support the economic expansion.
UBS’s Chen said on Sept. 22 that the Shanghai Composite would extend declines in the fourth quarter after losing 15 percent in the third quarter. The index slid 6.8 percent in the final three months of last year. Haitong’s Chen predicted a drop for equities in the second quarter of last year. The Shanghai Composite dropped 5.7 percent in that period.
The Shanghai Composite is valued at 9.7 times estimated profit, compared with the three-year average of 14.6. That compares with a multiple of 13.6 times for the BSE India Sensitive Index, 10.9 for Brazil’s Bovespa Index and 5.3 for Russia’s Micex Index. A gauge of property stocks in the Shanghai Composite trades at a record low of 6.9 times estimated earnings even after climbing 12 percent this year, according to data compiled by Bloomberg.
“Most stocks have reasonable valuations,” UBS’s Chen said. “In the short term, investors should focus on cyclicals such as property and machinery” because they will benefit first as economic growth picks up, he said.
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