China bulls still strong

After tumbling 5.6% over the past two sessions, chatter that the Chinese bull market is facing a rout after months of unrelenting rally is intensifying.

Source: Bloomberg

To be fair, the Shanghai Composite (SHCOMP) retreated from the 4500 level, shaving around 250 points. But when I look at the claims that equity valuations are excessive and could face a repeat of the 2007 crash, I am sceptical. To put things in perspective, the current price-to-earnings ratio (P/E) is at 20.96 (as of 6 May 2015) off the 22.0 seen in April 2015. In comparison, the P/E was 39.36 in 2007 and 48.78 in 2001 during the global dot-com bubble. This is not to say that a massive pullback may not happen but that the odds of it may not be as high as perceived.

Apart from further easing measures expected in the coming months, Chinese equities may also be supported by institutional demand. This will be welcomed as retail investors account for 80% of trading in China for the last five years, hitting 90% this year.  According to data released by the China Trustee Association, trust companies in the country increased their equity holdings by a record CNY 225 billion (USD 36 billion) in Q1. In addition, so many global money managers are underweight China. There is also an increasing prospect that China A-shares may be added to the MSCI emerging market benchmark indexes this June, which is tracked by USD 1.7 trillion of funds. All of this points to more potential demand for Chinese equities in the pipeline. The upshot is that the pullback in the last two days is no doubt a market correction, as investors cash in on their positions but it is unlikely to be a massive crash. 

Ahead of the Asia open

Underlying caution still lingers after US ADP data shows a lower-than-expected figure, leading to expectations that Friday’s all-important non-farm payrolls will be weak. Naturally, the market interprets this as further proof that the Fed will push back its rate hike plans and promptly sell the greenback. The dollar index tumbled to around 94.00 while the euro was lifted above 1.13 to two-month highs. Rising uncertainty was also reflected in the equity markets where most European bourses flat-lined while US indices ended lower.

Weak sentiments should prevail on Thursday although liquidity should improve with Japan returning from its golden week holidays. We are calling Asian equities lower with CSI300 4527 -26, Hang Seng 27569 -71, Nifty 8081 -16, MSCI Singapore 387.22 -2. On the calendar, we have Malaysian central bank (BNM) where consensus looks for a rate hold at 3.25%. We will also receive the HSBC services PMI in Japan followed by trade data from Malaysia and Taiwan.




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