Brace for more profit-taking in China

There are signs that investors globally have become a bit more cautious.

Chinese flag
Source: Bloomberg

We saw the retreat of US and European shares overnight, and signs of increased jitters with the Volatility Index recording rising 16% from the beginning of the week to 11.98.

With investors looking a bit more selective in their stock pickings, this could prompt more profit-taking over the week as we head into the earnings season in China.

Some sectors have already come under pressure such as small-caps, with research analysts raising concerns that they could disappoint in their upcoming quarterly earnings and start to lose steam.

Their worries stem from expectations that the Chinese economy underperformed in the first half of the year, where we saw GDP in the first three months slowing down to 7.4% – the weakest in 18 months.

On a year-to-date basis, the Shanghai Composite is down 2.4%, and the CSI 300 has dipped over 6.4%. Among the sectors that have suffered the brunt of the selloff include energy, healthcare, industrials and technology.

All this though has led to Chinese stock markets appearing relatively cheap, and could tempt some longer term investors to see this as a chance to buy on dips. The Shanghai Composite is currently at a P/E of 10.07, Hang Seng China Enterprises Index at 7.71, and the CSI 300 at 9.99.

We did see some support for property developers this week thanks to relaxed rules in some cities on home-purchase limits, such as in Wuhan which will allow local residents to buy a third home. However, the wider property slump concerns are likely to continue weighing down on sentiment until broader house prices turn around.

Another potential turnaround for market sentiment will be if corporate earnings do come out better than expected.

In the interim, investors can look out for another sign post tomorrow on where the economy is headed when we get China’s trade balance numbers for June, where exports are widely expected to rise by 10.4% and imports up by 6%.

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