A shares to be one of the silver linings of global equity market
A shares to be one of silver linings of global market
Published: Jul 14, 2019 07:23 PM

Illustration: Xia Qing/GT

Other than US stocks, which will likely continue to show resilience, Chinese mainland stocks trading at attractive valuations are believed to be another silver lining of the unsteady global equity market. 

If that does prove to be the case, the recent sluggishness in China's A-share market is not likely to indicate deeper woes for investors, although greater efforts will be required on the regulatory side to better protect retail investors who are still the backbone of the domestic stock market. 

Chinese mainland stocks have recently been inching lower in very thin trade as investors remain cautious ahead of the debut of the first batch of companies on Shanghai's STAR Market on July 22. 

The benchmark Shanghai Composite Index closed narrowly higher Thursday, while the Shenzhen Component Index ended the day in negative territory after opening higher, underperforming a global rally fueled by a stronger Federal Reserve rate cut case. 

During testimony before the House Financial Services Committee on Wednesday, Federal Reserve Chairman Jerome Powell said the Fed will "act as appropriate" as "crosscurrents" weigh on the US economy. All three major US stock indices hit record highs in intraday trade Wednesday.

However, Chinese mainland shares continued to languish. About 144 million shares worth 152.18 billion yuan ($22.16 billion) were traded on the Shanghai exchange. The volume on the Shenzhen bourse was 190 million shares valued at 196.29 billion yuan. Present daily trading volumes were merely a quarter of what was experienced in March.

Thin trades are thought to be partly attributed to concerns that the first companies to debut on the STAR Market might siphon money from stocks listed on other boards. While such unease could linger, there are signs of optimism for the A-share market.

Mainland stocks are fairly attractive in valuation terms. The average price-to-earnings (P/E) ratio of Asian shares stands at about 14 times, while US stocks hold a P/E ratio at roughly 17 times. 

Meanwhile, A shares, for their part, boast a forward P/E ratio of about 10 times. 

Additionally, while there is slim chance China's central bank could reduce interest rates, there is leeway for reductions in reserve requirements, favorably in a targeted fashion. 

In light of the regulatory push for funds to be channeled into the real economy, this move would suggest greater market liquidity to prop up business activity which would lift investor sentiment.

Especially worth noting is a shift among domestic listed firms toward focusing on free cash flow yields away from counting earnings on receivables, or debts owed to the firms by their clients that are yet to be paid for over a few years' time. The transition toward increased stable cash flow helps improve balance sheets, and fuels A-share investment worthiness overall.

As such, the Fed's move toward further rate cuts and China's pro-growth stimulus will shore up the markets across the Pacific, reducing downward pressure on the global market. This makes particular sense for investors seeking defensive holdings as the stock markets in export-oriented economies like Taiwan and South Korea tend to take a hit from falling earnings from companies whose outlook drops amid uncertainty. 

That said, more regulatory efforts are needed to ensure a safe voyage for Shanghai's STAR Market. As part of the drive to build a market intended to facilitate innovative, high-tech companies to raise funds directly from the financial market, companies using a variable interest entity structure in which an investor can hold a controlling interest without having a majority of voting rights will be allowed to float on the new market. 

Retail investors could find themselves at a disadvantage as class action lawsuits remain a missing piece of the nation's capital market reform. 

With the approaching STAR Market to serve as a pioneer of A share market reforms, it is hoped regulatory authorities could ramp up action to put in place a well-crafted and well-implemented safety net for retail investors who are eager to commit themselves to a prosperous domestic equity market.

The article was compiled by Global Times reporter Li Qiaoyi based on remarks by Raymond Deng, investment strategist CIO of consumer investment and insurance products at DBS Bank, at a media briefing in Beijing on Wednesday.