China’s Shanghai Composite is down 9% over the year-to-date despite the recent boost to sentiment provided by the European Central Bank’s commitment to unlimited sovereign bond purchases and further quantitative easing by both the US Federal Reserve and the Bank of Japan.
Schroders’ Jack Lee does not see a meaningful recovery in China’s A-share markets emerging until March next year, after the country’s incoming leaders have settled into their new roles and made clear how they intend to tackles its ongoing slowdown.
“Investors are bearish and not without reason. Although at historically low valuations, there aren’t any significant positive events or data to cheer,” he said. “The liquidity conditions in China continue to remain tight as the People’s Bank of China worries about a spike in [consumer prices] and asset price reflation if they ease too much.”
The market is also receiving negative signals from the Chinese banking sector, where an increase in overdue and non-performing loans highlights a further deterioration in its sset quality.
“Investors think banks are incapable of committing further on lending given the current tight liquidity and capital base,” Lee said. “It is still a riddle for us as to how the economy could get better without the funding support.”
Official data published today shows the Chinese economy has slowed for seventh quarter running, expanding by 7.4% in the third quarter, compared with 7.6% in the second. This is the first time the country has missed its growth target since early 2009.
Although this growth rate far outstrips that being seen in developed markets, it is unlikely to lift the domestic market for long. In addition, the Chinese economy is likely to be weaker than the official GDP numbers suggest, if other indicators such as purchasing managers’ indices and consumption growth are examined, Lee claimed.
In order for the current bearish sentiment towards the Chinese economy and equities to improve, a number of events need to occur, the commentator argued. These factors include structural reforms in A-share markets, consumer price inflation falling to 1% or less, looser monetary policy from the central bank or sequential improvements in corporate earnings.
“With the view that the real economy could improve towards H2 2013, the A-share markets should gradually recover by Q1 2013,” Lee explained.
“Having said that, we believe the recovery could just be a mild one, until the economy adjusts itself and finds the next growth engine. The shape of recovery could likely be a flattened V-shape."
