China can expect a slow bull market this year

By Li Qiaoyi Source:Global Times Published: 2017/3/1 21:53:39

Illustration: Peter C. Espina/GT

China's A-share market is likely to embrace a slow bull market this year, propped up by yuan stability, the ready availability of margin loans as well as rising downward pressure on the country's property market.

That said, mainland stocks are unlikely to deliver an explosive rally this year - like the US stock market has seen after the presidential election - but are also less likely to be exposed to the risk of a frothy market that the US might face in the second half of the year.

The mainland stock market, it needs to be pointed out, is being underpinned by domestic policy trends rather than changes in external markets. With the Chinese currency expected to remain stable for the whole of 2017 - which means a lack of impetus for capital flows out of the country, - investors will be more inclined to invest in the country's equity market.

Admittedly, the yuan's future moves will inevitably correlate with the US Federal Reserve's rate hike decisions. If the Fed decides not to raise the federal funds rate in March, the US dollar will gradually weaken and the yuan will trend slightly stronger. And if a rate hike happens in June, the dollar will gain strength and the yuan will lose some momentum. But it is more likely that the yuan will largely continue to be stable against the dollar throughout the year.

It should also be noted that margin trading is readily available in the mainland market, which is believed to play a part in reviving the market. Once blamed for partially triggering the stock market rout in the summer of 2015, margin lending that allows investors to borrow money to buy stocks and short selling that enables investors to borrow shares to short have both turned out to be a boon for the market. Although it's unlikely there will be a reemergence of the 2015 margin loan boom in which margin balance outstanding in the mainland stock market topped 2 trillion yuan ($291 billion) in the near future, signs of a pickup in margin lending and short selling activities suggest a rise in investor risk appetite, and accordingly bode well for a slow bull market. The country's outstanding margin balance stood at 908.2 billion yuan as of Monday according to statistics from the Shanghai and Shenzhen bourses.

In another sign of the mainland stock market's stable trend, the China Financial Futures Exchange announced in mid-February a relaxation on rules for stock index futures trading which outfits investors with a tool to hedge against risks.

On top of that, if the Chinese mainland's property market is set to be under growing pressure, it is likely that money will flow from the housing market to the stock market. The latest data from the National Bureau of Statistics has shown that the property market in the country's first- and second-tier cities has at least stopped from sizzling further. Over the past decade, it has been the case that the property market and the equity market come across as the two ends of the seesaw for most average investors. When the end with the property market is down, the other end, the stock market, will naturally be up.

Certainly, the mainland stock market is by no means immune to risks, with a major concern caused by the possibility of tighter liquidity. But overall, mainland stocks are set for a slow, steady bull run in 2017.

By comparison, a continued post-election rally, which has pushed all three major US stock indexes to record highs, should not be taken for granted in the second half, as uncertainties linger over whether the implementation of Donald Trump's policies will be well received by the market. Trump still has two trump cards in his hands to revive the US economy, tax policy revision and an infrastructure spending binge, two areas that he has been adept at as a property tycoon. While both strategies supposedly would give the economy a shot in the arm, and without any doubt give a boost to US stocks, Trump's inexperience in taking on his new role as a politician rather than a company boss still casts the outlook for his pro-growth policies in doubt.

Also, more fluctuations are on the way in the US market along with the Fed's quicker pace expected in rate hikes. Investors are therefore advised to be watchful of possible risks in the US stock market later this year.

The article was compiled by Global Times reporter Li Qiaoyi based on remarks by Frank Lee, acting chief investment officer for North Asia at DBS Bank, at a recent media briefing in Beijing.

Posted in: INSIDER'S EYE

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