Time to get back into Chinese stocks

It may be a good time to return to the Chinese stock market.

One of the clearest bellwethers was the recent announcement by the China Securities Regulatory Commission to restart the initial public offering (IPO) market, and let 10 companies resume their launches within the next two weeks. Investors took this as a sign of confidence and pushed the Shanghai Composite Index up more than 6% and A-share turnover surged to more than 1 trillion renminbi per day.

In addition, Asia Unhedged expects the A-share market to gain another 5% – 10% in the coming week with the additional confidence boost from the release of details by President Xi on the 13th Five Year Plan and the implementation of several stabilizing policies.

Average home prices in October, saw price appreciation for the third consecutive month. In the automobile sector, October’s passenger vehicle sales leapt by 11.3% year over with the help of 50% tax cuts imposed on Oct. 1 to boost demand. This was a big jump from the 2.5% year-over-year sales increase in September. Dealers are also discounting to clear inventories, with passenger car inventories expected to fall sharply.

More domestic investors are using margin debt, as 13.9% of the turnover is margin buys. The balance surged by 500 billion yuan over the week to close at nearly 1.1 trillion.

However, offshore investors are not as optimistic and have been trimming their positions on the mainland bourses. There were 13 consecutive days of net selling via the stock connect before some buying took place on Friday.

Consumer prices in China rose just 1.3% in the year to October, the National Bureau of Statistics said Monday – the lowest since May and down sharply from 1.6% in September. It was also well below market expectations of 1.5%.

However, we believe consumption will be the driver for fourth-quarter gross domestic product growth. Home and automobile-related stocks have performed well this week and the momentum is expected to continue.

This week, consumer discretionary and staple items are definitely plays. We recommend stocks falling under the consumer durables, household products and food, beverage and tobacco sectors.

Corporates will be looking to boost their sales or clear some inventory on Alibaba’s “Single’s Day” or “Double Eleven” event which falls on Wednesday. This is the day where huge discounts can be found on Alibaba’s T-mall and Taobao platforms. Other e-commerce companies such as JD.com are also competing ferociously to snatch a slice of the pie.



Categories: Asia Unhedged, China

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