China’s Shanghai Composite Index (SHCOMP) will probably extend its three-month rally as accelerating growth lifts valuations from the lowest level among major markets, said Bocom International Holdings Co. and Tisco Asset Management Co.
A gauge of services industries in the world’s second-biggest economy rose to a six-month high in September while Premier Li Keqiang said China can meet its main economic targets in a speech on Sept. 30, the last trading day before local markets shut for the National Day break. The Bloomberg China-US Equity Index of the most-active Chinese shares in the U.S. has since gained 2.1 percent, while the Hang Seng China Enterprises Index (HSCEI) added 1.1 percent in Hong Kong.
“Data flow on China during the holiday period has been positive,” Hao Hong, a Hong Kong-based strategist at Bocom International, a subsidiary of China’s fifth-biggest bank by market value, said in an e-mail interview yesterday. “Valuation is still cheap, especially relative to developed markets, and fundamentals are improving.”
The Shanghai Composite climbed 3.6 percent last month, extending its gain from a four-year low in June to 12 percent. The gauge is valued at 8.7 times analysts’ earnings estimates for the next 12 months, the lowest level among the world’s 15 biggest markets, according to data compiled by Bloomberg. That compares with a multiple of 10 for the MSCI Emerging Markets Index and 14 for the Standard & Poor’s 500 Index.
The Bloomberg index tracking major Chinese stocks trading in the U.S. slipped 1.1 percent to 103.56 in New York, declining for the first time in five days, as the U.S. entered the second week of a partial government shutdown and a potential lapse in U.S. borrowing authority loomed 10 days away.
“I don’t think the U.S. will default,” Jeff Papp, a senior analyst at Oberweis Asset Management Inc., said in an e-mailed reply from Lisle, Illinois yesterday. “Now, most in the China ADR space have had awesome gains this year. So if you want to lock in profits, that’s fine at these levels.” Oberweis’s $165 million China Opportunities Fund has gained 45 percent this year, beating 96 percent of its peers tracked by Bloomberg.
The Bloomberg China-US gauge closed at 104.76 on Oct. 4, the highest since May 2012, as Twitter Inc.’s planned initial public offering boosted social-media companies. American depositary receipts of Renren Inc., (RENN:US) a social networking website, has jumped 22 percent since Sept. 30, while Sina Corp., which owns a microblogging service, has rallied 8.6 percent.
Twitter, which has more than 200 million monthly users, made public its S-1 prospectus on Oct. 3, saying it’s seeking to raise $1 billion in an IPO. The documents suggested a valuation of $12.8 billion.
The Hang Seng China AH Premium Index, which measures the price of mainland-traded Chinese shares versus Hong Kong counterparts, closed at 99.99 yesterday. That compares with the five-year average of 112.15.
“Most Chinese stocks should have a positive reaction on the good data,” Saharat Chudsuwan, a Bangkok-based senior vice president at Tisco Asset Management, which has about $4.7 billion of assets, said by phone on Oct. 4. “The domestic shares should catch up.”
China’s services index rose to 55.4 in September from 53.9 in August, the Beijing-based National Bureau of Statistics and Federation of Logistics and Purchasing said on Oct. 3. A number more than 50 indicates an expansion.
Gains in non-manufacturing industries help Li shift the nation away from dependence on exports and investment, a strategy that may get mapped out at a Communist Party meeting in November. China’s economy is stabilizing in a good trend and the country has the confidence and ability to realize its main economic targets, Li said at a National Day celebration reception, China National Radio reported.
“The strength in the services really bodes well for the story of shifting from an export to domestic consumption-driven economy,” Jay Jacobs, a research analyst at Global X Funds, a New York-based exchange-traded fund firm that manages $2.3 billion, said by phone Oct. 4. “It really shows the economy is becoming more well-rounded, more self-sufficient.”
Chinese shares fell in Hong Kong yesterday, sending the Hang Seng China gauge down 0.9 percent.
In the U.S., Ctrip.com International Ltd. (CTRP:US), China’s largest online travel agency, tumbled 4 percent to $55.90, the biggest drop since June. Software developer Qihoo 360 Technology Ltd. (QIHU:US) sank 3.6 percent to a three-week low of $83.07. Shanda Games Ltd. (GAME:US), an online game operator, surged 12 percent to a seven-week high of $4.64.
The iShares China Large-Cap ETF, the largest Chinese exchange-traded fund in the U.S., slumped 1.1 percent to $37.60. The Standard & Poor’s 500 Index retreated 0.9 percent as lawmakers remained deadlocked over extending the nation’s debt limit to avoid a default.
Treasury Secretary Jacob J. Lew said Congress needs to pass a debt-ceiling increase by Oct. 17 or the U.S. will be “dangerously low” on cash and risk defaulting on its payments. The $12 trillion of outstanding government debt is 23 times the $517 billion Lehman Brothers Holdings Inc. owed when it filed for bankruptcy on Sept. 15, 2008. The Shanghai Composite tumbled 25 percent in October 2008.
Chinese companies will begin releasing third-quarter results this month, with China Molybdenum Co. (3993), a mining company based in Henan Province, among the first scheduled to report on Oct. 14. Shanghai Composite profits will probably increase 31 percent during the next 12 months, versus 13 percent for the MSCI emerging markets index, according to analyst projections compiled by Bloomberg.
“We have been recommending clients to buy China,” Steve Wang, the Hong-Kong based chief China economist at Reorient Group Ltd., said in an Oct. 4 e-mail. “The coming phase of Chinese equities will offer significantly better performance.”
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