Cheap valuations make China stocks a great takeaway

Shanghai's stock market, the world's worst performer this year after Greece, has started to rebound after plunging as much as 30 percent this year.

With valuations at their lowest in 19 months and as confidence mounts that China can orchestrate a controlled slowdown, analysts say the benchmark index .SSEC could gain another 13 percent by the year end.

Despite recording the best growth amongst the major economies, China's domestic share market tumbled in the first half as Beijing took a slew of steps to cool the red-hot property sector and liquidity tightened due to large initial public offerings.

The sharp slide has also pushed Shanghai's A shares into a discount versus mainland stocks listed in Hong Kong .HSCAHPI, for the first time in four years in June, and combined with technical indicators, point to a reversal in the trend.

As expectations grow that policymakers have done enough for now to cool the economy, Chinese retail investors, who account for two-thirds of stock market turnover, are rushing back to pick up shares now at their cheapest since December 2009.

Benjamin Chang, CEO of LBN Advisers, in Hong Kong said now was the time to buy into the A share market.

"Actually I was already buying a week or two ago. We thought the valuations were reasonable with good growth," Chang said.

Well-known investors such as Fidelity fund manager Anthony Bolton are also arguing that now is the time to buy into the Chinese stock market.

The steep fall has left the Shanghai benchmark index trading at 12.60 times estimated forward 12-month earnings, its lowest in 19 months and down about 40 percent from a year ago.

The last time valuations were this low, the index gained about 60 percent in the following six months, according to Thomson Reuters I/B/E/S data.

But analysts and traders expect the rebound to be much more subdued this time, with the index seen gaining 13 percent to 3,000 points by year end, as a flood of new share sales are expected to continue.

IPOs, rights and other share issues have totaled about 450 billion yuan ($66 billion) so far this year, including Agricultural Bank of China's (601288.SS) mammoth $20 billion IPO this month, and some 350 billion yuan more are expected for the rest of the year, traders say.

Policy Assurance

Annual economic growth hit 11.9 percent in the first quarter, raising concerns the world's third-largest economy may be overheating. The worries have subsided as signs emerged that Beijing would succeed in slowing growth to around 10 percent in 2010.

Premier Wen Jiabao and President Hu Jintao have in the last week emphasized the need for monetary policy to be accommodative while improving measures to stimulate domestic consumption, comforting investors who feared more policy tightening.

"There is increasing confidence that the stock market is recovering. Investors are expecting a more steady macro policy outlook and do not expect large changes in policy adjustments this year," said Xu Yinhui, analyst at Guotai Junan Securities in Shanghai.

After hitting a 15-month low early this month, the Shanghai index has rebounded 11 percent, with daily trading volumes nearly doubling.

Property and banking stocks, which were hit hardest during the downturn, have outperformed with heavyweight property developer Gemdale (600383.SS) rising 16 percent and Merchants Bank (600036.SS) gaining 13 percent since early this month.

Chinese retail investors, who often flock to the market during upturns and stay away during downturns, have been rushing back to open trading accounts in the last few weeks, further evidence the rally has legs.

Technical indicators are pointing to a more bullish market, analysts said, adding that if volume levels remained b there may be a steeper rise.

The fast and the trend lines on the weekly Moving Average Convergence Divergence (MACD) are about to cross, which would signify a turn in the trend.

($1=6.778 Yuan)

[Source: Reuters, London, 29Jul10]

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