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Overnight, the UK election exit polls showed that the Conservatives will win 316 seats compared to Labour’s 239. This is a big discrepancy between the pre-polling estimate and exit polls, which saw a massive spike in Cable as it shot up over 1%. If the actual numbers are in line with the exit polls, the FTSE will likely see a similar reaction.
US and European markets closed in varied performance ahead of the heavy calendar on Friday. The main one will certainly be the April non-farm payrolls print where the market is looking for 228,000 added. Expectations may be dialled a notch lower after a ADP jobs report show a weaker-than-expected number at 169,000. Lower-than-expected initial jobless claims added another positive to mixed labour data. The reading showed 265,000 claims when the market was expecting 278,000.
We also have Greek debt payments and further EU discussions to digest, alongside the RBA’s Statement of Monetary Policy and China’s trade numbers.
Correction fears in Chinese equities
The Shanghai Composite (SHCOMP) chalked up another 2.8% of losses yesterday, bringing it to a total loss of 8.2% in the past three sessions. Naturally, the market is assessing whether a deep correction is in progress, evoking memories of the massive fall back in 2008. Certainly, another negative print today is expected to see the Index registering the biggest weekly drop in over six years, since Feb 2009. Notwithstanding this, the fears may be overblown in my view. While several banks citing high valuations as downside risk to Chinese equities, the current P/E ratio of SHCOMP at 20.4x is just half of what it was in 2007 (39.4x), and less than half to that in 2001 (48.8x) during the dot-com bubble.
Admittedly, a number of developments have supported the fears, including a huge number of new stock accounts, a record high outstanding margin debt (CNY 1.24 trillion or USD 200 billion as of 1 May 2015), and some curbs on margin trading. But there are also significant support for Chinese equities coming from various avenues – more easing measures expected in the pipeline, potential of global money managers who have been underweight China shifting funds to the world’s second-largest economy, the increase in domestic stock investments from China’s trust companies.
Ahead of the Asia open
We expect markets in Asia to be mildly in the positive. Our calls are CSI300 4515 +45, Hang Seng 27427 +138, Nifty 8036 -21, MSCI Singapore 387.32 +0.3.