China stock alarm bells rebuffed as JPMorgan, BlackRock stay upbeat, market barometers remain a distance from 2015 crash triggers

• Price-earnings multiple, leveraged accounts, trading volume and overbought ratio are still below their 2015 levels
• JPMorgan remains bullish on GDP outlook while BlackRock, Julius Baer see Chinese equities as intrinsic to portfolio holdings

Zhang Shidong in Shanghai

Published: 7:30am, 18 Jan, 2021

Since the March 23 bottom, more than US$4.5 trillion of market value has been created in a span of nine months. Photo: Bloomberg

China’s stocks have climbed out of the depths of the Covid-19 crisis to zip past a 13-year high in the early days of the new year. Not surprisingly, some bears have sounded the alarm bells in the US$11.2 trillion market amid some wobbles.

Since the March 23 bottom, more than US$4.5 trillion of market value has been created in a span of nine months, putting the 61 per cent rally under the microscope. The CSI 300 Index surpassed the 2015 high on January 5, taking it to within 8 per cent of the 2007 peak. The initial excitement has given way to worries about a repeat of the US$5 billion meltdown five years ago.

Yet, talks of froth in the domestic A-share market may be premature. JPMorgan Asset Management sees further price upside on the strength of the nation’s economic recovery. While some individual stocks such as Kweichow Moutai and Contemporary Amperex are breaking records, other analysts point to market signals – from valuation to leverage and sentiment barometers – for assurance.

“The core assets are not cheap based on the historical average, but they have not reached the extreme level in valuation,” said Zhou Jianhua, an analyst at Central China Securities. “The medium-term uptrend remains unchanged.”

China’s economic rebound is seen as a linchpin to global recovery from the Covid-19 crisis. Growth was 6.5 per cent last quarter, the government said on Monday, quickening from 4.9 per cent in the preceding three months. That could be a catalyst to healthy corporate earnings, JPMorgan Asset’s strategist Sylvia Sheng wrote.

The economy is expected to grow 7.9 per cent in 2021, according to the International Monetary Fund, a downgrade from its forecast of 8.2 per cent in October. Still, no other major global economies will expand at anywhere near that pace.

“We see assets exposed to Chinese growth as core strategic holdings that are distinct from emerging-market exposures,” strategists at BlackRock wrote in a January 11 report. “There is a clear case for greater exposure to China-exposed assets for returns and diversification.”

MONDAY TO FRIDAY

Global investors are well compensated for risks including high domestic borrowings, potential currency depreciation and US-China conflict, they said, adding that many funds are underinvested in Asia while China’s weight in global indexes grows.

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That may support the biggest stocks listed on the Shanghai and Shenzhen bourses. At 16.2 times the projected price-earnings multiple, the CSI 300 Index is still some 12 per cent cheaper than the levels before the market reached its peak in the 2015 episode, according to Bloomberg data.

Besides, leveraged bets and daily trading values are not anywhere near those euphoric proportions which might have derailed the current bull run. Likewise for the number of overheated stocks, or securities indicated by their “overbought” technicals.

This year, daily stock trading has averaged about 1 trillion yuan (US$154.3 billion), less than half the 2.4 trillion yuan volume at the peak of the 2015 bull market.

Stock purchases using borrowed money – often a key driver in China’s momentum-driven market – stood at 1.5 trillion yuan on Friday. That is still 35 per cent below the record leverage that triggered the regulatory crackdown in 2015.

To be sure, risks abound. As recovery gains traction, policymakers are keeping their hands firmly on the levers to contain debt default and systemic risks. Property developers have been given three red lines to comply with. Antitrust actions against a handful of internet-platform operators have knocked billions off the values of Alibaba Group Holding (the owner of this newspaper), Tencent Holdings and Meituan stocks.

The risk to equities is an over-tightening of policy, JPMorgan said. Beijing’s unwinding of ultra-loose monetary policies, which resulted in a flurry of bond defaults last year, will continue into 2021 and weigh on equity sentiment, according to BCA Research.

“We recommend a neutral position in Chinese stocks for now,” Jing Sima, a market strategist at BCA, said in a January 13 report. “Chinese stocks are already expensive and are vulnerable to authorities opting for much smaller stimulus and harsher corporate (and) state-owned enterprise reforms.”

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The CSI 300 saw volatile trading last week, with the gauge tumbling almost 2 per cent for the biggest loss in four months on Thursday. Last year’s winners like liquor distillers and new-energy linked stocks were out of favour.

Granted, some stocks are pulling back after a stellar run-up. Kweichow Moutai outranked the 2019 size of Shenzhen’s economy and electric-car battery maker Contemporary Amperex became larger than Bank of China and PetroChina, for example.

Some 7 per cent of stocks listed in Shanghai were “overbought” this month, according to a technical indicator known as the relative-strength index. Yet that is minuscule compared with a 74 per cent rate before the 2015 market crash, according to Bloomberg data.

“There’s a bit of froth on valuation in every part of the world,” said Bhaskar Laxminarayan, chief investment officer for Asia-Pacific at private bank Julius Baer. “Relative to the rest of the world, China certainly does not look too expensive.” China has become intrinsic to the global investment portfolio, he added.

While calling some blue-chip stocks a bubble, Guotai Junan Securities said it is tough to predict when they will deflate or burst. It may not come so soon as to spoil the mood before the Year of the Ox kicks off on February 12.

“It’s highly likely that investors can still ride on the bull run in the short term,” said Chen Xianshun, a strategist at the brokerage. “The odds are low that a turning point will occur before the Spring Festival,” referring to the Lunar New Year next month.