China's Breakneck Stock Rally Is About to Slow, Say Analysts

(Bloomberg) -- The breakneck pace of China’s equity rally will decelerate in the coming months, according to strategists who are forecasting the kind of slow bull market that would likely be well-received in Beijing.

The Shanghai Composite Index will climb to 3,200 -- or 3.1 percent from Friday’s close -- by the end of June, according to 21 analysts and fund managers surveyed by Bloomberg this month. That compares to the 24 percent surge since the start of the year.

Analysts were cautiously optimistic at the close of 2018, and this year’s bull market in major gauges has exceeded expectations. With the rally since October adding more than $2 trillion in value, China’s world-beating stocks put authorities on the alert to prevent a repeat of the 2015 crash. They’ve warned on gray-market leverage and speculative trades while relaxing trading rules, treading a careful line to create a more benign environment for companies to get much-needed financing from the stock market.

“Equity financing is a national strategy and a top priority for the stock market,” said Shi Wenbien, an analyst with Yuanta Securities Co., adding that China wants to lift the weight of equity financing in its total social financing. “The stock market should be the engine for the economy.”

Still, predictions for stocks on an annual basis are pretty optimistic: the median forecast of 19 survey participants sees the Shanghai benchmark rising to 3,500 by year end, which implies a gain of 40 percent from 2018, when the index posted its worst performance in a decade. The gauge closed up 0.1 percent on Friday.

Most analysts said stocks will be supported by China’s stimulus policies, including tax cuts, an easier liquidity environment and potential inflows after A shares’ inclusion by foreign index compilers. To be sure, analysts haven’t always made the right call, after failing to predict last year’s slide.

Economic fundamentals and corporate earnings will also need to catch up to put stocks on a more solid footing, survey respondents said, as some of the positives may have been priced in.

It’s a different story for Hong Kong, even though China-domiciled companies account for nearly half the weighting of the Hang Seng Index. The gauge is seen rising 3 percent to 30,000 points by end-June before giving up 500 points by year-end, according to the median forecast of 10 analysts. While Hong Kong is influenced by China’s economic fundamentals, it’s more closely correlated with U.S. stocks.

Other key findings from the survey that took place March 15-19:

• Eleven out of 19 respondents boosted their year-end 2019 targets for the Shanghai Composite
• The CSI 300 Index of some of the largest firms listed in Shanghai and Shenzhen may reach 4,000 points at end-June, according to the median estimate of 16 analysts, implying a 4.3 percent gain from Friday’s close
• The ChiNext gauge is seen rising to 1,800 points by end-June (median of 16 respondents), implying a 6.3 percent gain
• The Hang Seng China Enterprises Index may climb 4.2 percent to 12,000 points (median of 10 analysts)
• Non-bank financial and telecom stocks in China and Hong Kong markets liked by most survey participants in 2Q
• Defensive sectors such as consumer stocks may underperform in 2Q on the mainland, while developers and exporters are seen lagging in Hong Kong

The survey participants that provided index targets include: Bright Smart Securities & Commodities Group Ltd., Guodu Securities Co., HFT Investment Management Co., Shanghai RiverEast Asset Management Advisory Ltd., First Seafront Fund Management Co., XuFunds Investment Management Co., Hengsheng Asset Management Co., Alphalex Capital Management (HK) Ltd., Everbright Sun Hung Kai Co., Capital Corise Asset Management Co., PGC Capital, Zhongrong Fund Management Co., Shenzhen Spruces Capital Management Co., China Minsheng Trust Co., Beijing Chengyang AMC Ltd., First Shanghai Securities Ltd., KGI Securities Co., Shenwan Hongyuan Group Co., Capital Securities Corp., Cathay Securities Investment Trust Co., Zhongtai Securities Co.

To contact Bloomberg News staff for this story: Amanda Wang in Shanghai at twang234@bloomberg.net;Jeanny Yu in Hong Kong at jyu107@bloomberg.net;Ken Wang in Beijing at ywang1690@bloomberg.net;Cindy Wang in Taipei at hwang61@bloomberg.net;Amy Li in Shanghai at yli677@bloomberg.net;Mengchen Lu in Shanghai at mlu157@bloomberg.net;Ludi Wang in Shanghai at lwang191@bloomberg.net

To contact the editors responsible for this story: Richard Frost at rfrost4@bloomberg.net, ;Jessica Zhou at jzhou75@bloomberg.net, David Watkins, Philip Glamann

©2019 Bloomberg L.P.

With assistance from Bloomberg