China equities lead Asia

Regional equity markets generally ended the week on a positive mood after a cagey week packed with event risks. With IPO jitters largely unfounded, China added over 2% as money flows back into the equity markets. 

Hong Kong
Source: Bloomberg

Chinese markets are once again looking compelling although further outperformance will depend on how policymakers react to renewed bullishness. News of Guotai Junan Securities’ plans to raise USD 4.5 billion gave a fresh push to traders. The Shanghai Composite (SHCOMP) closed with its biggest weekly gain since December. But what is more impressive is the Shenzhen stock rally, which has outpaced rallies in Shanghai and Hong Kong. The Shenzhen Composite (SZCOMP) continued to post new record highs and higher highs, and moved to its best weekly gain since 2008.

A raft of positive news has given more confidence to the equity bulls. While the large volatility in Shanghai shares may have put off some retail traders in the short term, the one-way street in Shenzhen equities is giving a free pass.

The strong surge has seen the SZCOMP trading at a much higher valuation at 40.4 times consensus 12-month average, to SHCOMP’s 18.7x, in comparison. Likewise, China A50 also powered past 14,000 on Friday and with a relatively low P/E ratio of 12.2 times consensus 12-month average, it looks like a buy into 14,000. In addition, the 20-day moving average at 13,605 may protect against any pullbacks. Sentiment in China remains firm with margin trading and opening of new accounts continuing to head higher.

STI ticks up

Of late, volatility in Singapore equities has stayed on the low side amid waning interests in the domestic capital markets. Trading volume in the Straits Times Index (STI) is below the 30-day average by around 15%. However we have seen better buying in agricultural and commodity counters recently, helped by fears that the El Nino phenomenon may disrupt supply.

Noble Group, Golden Agri and Wilmar were among the most actively traded stocks on Friday.

The STI continues to trade at a premium over its longer-term average at 14.3 times consensus 12-month average. With little to excite the traders, the higher valuation may have discouraged the fundamental investors. The 100-day moving average at 3422 has contained retreats since January and the resilience to stay above here would pave the way for a potential rebound. A clearance of 3475 may unleash a more bullish development.

Current BOJ stance remains appropriate

We see limited odds of additional easing from the BOJ as governor Kuroda remains optimistic about Japan’s economic improvement and rising inflation expectations. He reiterated his confidence in reaching the 2% inflation target in first half of fiscal 2016 with the BOJ raising its outlook for private consumption.

While I continue to think that BOJ may be held back in terms of the amount of domestic bonds it can purchase going forward, Kuroda-san apparently disagree. Interestingly, the governor leaves the door open for more monetary tweaks if the need arises. He added that it is too early to discuss a scale-back of the aggressive QQE programme. This means that the Japanese yen will likely remain weak in the near term. 

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