China Stock Alarms Get Louder as Morgan Stanley Ends Bullish Bet
2015-05-07 02:19:29.985 GMT
By Kana Nishizawa
(Bloomberg) -- Add Morgan Stanley and BNP Paribas
Investment Partners to the list of forecasters sounding an alarm
about China’s stock market.
Jonathan Garner, the chief Asia and emerging market
strategist at Morgan Stanley, downgraded Chinese stocks for the
first time in more than seven years on Thursday, citing the
weakest corporate profits since 2009. BNP Paribas has sold some
Chinese shares listed in Hong Kong on concern about ballooning
mainland margin debt and the growing mismatch between equity
prices and a deteriorating economy.
The Hang Seng China Enterprises Index of mainland companies
traded in Hong Kong surged to a seven-year high last month amid
record turnover in the city, before the advance stalled for the
past two weeks. UBS Group AG expects regulators to step in to
curb mainland gains, while asset managers from Macquarie
Investment Management to Baron Capital Inc. have voiced concern
that the rally has gone too far, too fast.
“When a market goes crazy like this, no other topic
becomes interesting,” Arthur Kwong, the head of Asia Pacific
equities at BNP, which oversees about $573 billion globally,
said in an interview on April 29. “That’s a big negative signal
-- it’s as if nothing else is important. That makes me
paranoid.”
China’s economy grew last quarter at the slowest pace since
2009 and reports from manufacturing to industrial output and
exports missed estimates. Stock investors have largely taken bad
news as good, with the Shanghai Composite Index up 70 percent
through Wednesday since the central bank cut interest rates on
Nov. 21 on optimism that policy makers will put a floor under
the slowdown.
Catch-up Rally
Mainland companies traded in Hong Kong trailed the rally
until March, when China’s securities regulator said more fund
managers could buy equities listed in the city. The Hang Seng
China Enterprises Index soared 18 percent since then and
turnover through the Shanghai-Hong Kong bourse link jumped. A
similar Shenzhen cross-border trading program is expected this
year.
Kwong says investors are too obsessed with the impact of
money flows through the connect, and the stock frenzy reminds
him of the market peak in 2007.
“Now it’s very unfashionable to talk about being careful,
it’s quite old fashioned,” he said. “Fundamentally we are
worse, but the market excitement is similar. This is something
that worries me.”
2007 Peak
The H-share gauge surged to an all-time high in October
2007, then plunged 76 percent within a year. Before mid-2008,
Chinese manufacturing was expanding, industrial output was
increasing at almost triple the current pace, and gross domestic
product growth was above 10 percent. The stock index today is 46
percent away from its 2007 peak. It slipped 0.7 percent at 9:59
a.m. local time, while the Shanghai Composite extended its
three-day decline to 6.8 percent.
For Garner, the downgrade to equalweight from overweight
for shares in the MSCI China Index was spurred by rising
valuations and deteriorating earnings. The gauge’s price-to-book
ratio is now the highest since March 2012 and return on equity,
a gauge of profitability, has shrunk to the lowest since the
global recession six years ago, the Hong Kong-based strategist
wrote in a report.
“China is no longer going to outperform other emerging
markets,” Garner said in a phone interview Thursday. “We’d
like to recommend taking some profits.”
Margin Debt
Chinese investors are borrowing record amounts to plow into
equities. The outstanding balance of margin debt on the Shanghai
exchange climbed to an all-time high of 1.24 trillion yuan ($200
billion) on Tuesday, while the number of Chinese stock accounts
containing funds increased to a record 63.7 million in the week
ended May 1.
Bulls say they’re making the right call. The market can
only be considered in a bubble if it doubles, and China remains
attractive relative to other emerging and Asian markets based on
valuations, Citigroup Inc. analysts led by Markus Rosgen wrote
in a note last month.
BNP’s Kwong says he’s now “a bit underweight” on China
relative to the benchmarks he tracks. He recently sold some
infrastructure and heavy machinery shares and shifted into
insurers, which have lagged the rally, declining to name
specific companies. The MSCI China Industrials Index surged 28
percent since March 27, compared with an average 16 percent rise
by the nation’s top three insurers.
Kwong has added shares from Southeast Asia, which have
better prospects for a rally, he said. Still, there are pockets
of China’s market with attractive companies even if the overall
outlook isn’t promising, he said.
“Even though we are skeptical about the market, the recent
rally is something you must submit to,” said Kwong. “When the
market is going up and you’re saying something rational, people
wouldn’t want to listen. But based on fundamentals, I need to
remind people and be responsible.”
For Related News and Information:
Rule No. 1 in China’s Bull-Market Rally: Don’t Look at Earnings
As China Stocks Outrun the 2007 Bubble, UBS Braces for Clampdown
Top Stories:TOP<GO>
Most-read emerging-market news: MNI EM 1W <GO>
Developing economy market moves: EMMV <GO>
--With assistance from Kyoungwha Kim in Hong Kong.
To contact the reporter on this story:
Kana Nishizawa in Hong Kong at +852-2977-4627 or
knishizawa5@bloomberg.net
To contact the editors responsible for this story:
Sarah McDonald at +61-2-9777-8684 or
smcdonald23@bloomberg.net;
Michael Patterson at +852-2977-4820 or
mpatterson10@bloomberg.net
Chris Nagi
2015-05-07 02:19:29.985 GMT
By Kana Nishizawa
(Bloomberg) -- Add Morgan Stanley and BNP Paribas
Investment Partners to the list of forecasters sounding an alarm
about China’s stock market.
Jonathan Garner, the chief Asia and emerging market
strategist at Morgan Stanley, downgraded Chinese stocks for the
first time in more than seven years on Thursday, citing the
weakest corporate profits since 2009. BNP Paribas has sold some
Chinese shares listed in Hong Kong on concern about ballooning
mainland margin debt and the growing mismatch between equity
prices and a deteriorating economy.
The Hang Seng China Enterprises Index of mainland companies
traded in Hong Kong surged to a seven-year high last month amid
record turnover in the city, before the advance stalled for the
past two weeks. UBS Group AG expects regulators to step in to
curb mainland gains, while asset managers from Macquarie
Investment Management to Baron Capital Inc. have voiced concern
that the rally has gone too far, too fast.
“When a market goes crazy like this, no other topic
becomes interesting,” Arthur Kwong, the head of Asia Pacific
equities at BNP, which oversees about $573 billion globally,
said in an interview on April 29. “That’s a big negative signal
-- it’s as if nothing else is important. That makes me
paranoid.”
China’s economy grew last quarter at the slowest pace since
2009 and reports from manufacturing to industrial output and
exports missed estimates. Stock investors have largely taken bad
news as good, with the Shanghai Composite Index up 70 percent
through Wednesday since the central bank cut interest rates on
Nov. 21 on optimism that policy makers will put a floor under
the slowdown.
Catch-up Rally
Mainland companies traded in Hong Kong trailed the rally
until March, when China’s securities regulator said more fund
managers could buy equities listed in the city. The Hang Seng
China Enterprises Index soared 18 percent since then and
turnover through the Shanghai-Hong Kong bourse link jumped. A
similar Shenzhen cross-border trading program is expected this
year.
Kwong says investors are too obsessed with the impact of
money flows through the connect, and the stock frenzy reminds
him of the market peak in 2007.
“Now it’s very unfashionable to talk about being careful,
it’s quite old fashioned,” he said. “Fundamentally we are
worse, but the market excitement is similar. This is something
that worries me.”
2007 Peak
The H-share gauge surged to an all-time high in October
2007, then plunged 76 percent within a year. Before mid-2008,
Chinese manufacturing was expanding, industrial output was
increasing at almost triple the current pace, and gross domestic
product growth was above 10 percent. The stock index today is 46
percent away from its 2007 peak. It slipped 0.7 percent at 9:59
a.m. local time, while the Shanghai Composite extended its
three-day decline to 6.8 percent.
For Garner, the downgrade to equalweight from overweight
for shares in the MSCI China Index was spurred by rising
valuations and deteriorating earnings. The gauge’s price-to-book
ratio is now the highest since March 2012 and return on equity,
a gauge of profitability, has shrunk to the lowest since the
global recession six years ago, the Hong Kong-based strategist
wrote in a report.
“China is no longer going to outperform other emerging
markets,” Garner said in a phone interview Thursday. “We’d
like to recommend taking some profits.”
Margin Debt
Chinese investors are borrowing record amounts to plow into
equities. The outstanding balance of margin debt on the Shanghai
exchange climbed to an all-time high of 1.24 trillion yuan ($200
billion) on Tuesday, while the number of Chinese stock accounts
containing funds increased to a record 63.7 million in the week
ended May 1.
Bulls say they’re making the right call. The market can
only be considered in a bubble if it doubles, and China remains
attractive relative to other emerging and Asian markets based on
valuations, Citigroup Inc. analysts led by Markus Rosgen wrote
in a note last month.
BNP’s Kwong says he’s now “a bit underweight” on China
relative to the benchmarks he tracks. He recently sold some
infrastructure and heavy machinery shares and shifted into
insurers, which have lagged the rally, declining to name
specific companies. The MSCI China Industrials Index surged 28
percent since March 27, compared with an average 16 percent rise
by the nation’s top three insurers.
Kwong has added shares from Southeast Asia, which have
better prospects for a rally, he said. Still, there are pockets
of China’s market with attractive companies even if the overall
outlook isn’t promising, he said.
“Even though we are skeptical about the market, the recent
rally is something you must submit to,” said Kwong. “When the
market is going up and you’re saying something rational, people
wouldn’t want to listen. But based on fundamentals, I need to
remind people and be responsible.”
For Related News and Information:
Rule No. 1 in China’s Bull-Market Rally: Don’t Look at Earnings
As China Stocks Outrun the 2007 Bubble, UBS Braces for Clampdown
Top Stories:TOP<GO>
Most-read emerging-market news: MNI EM 1W <GO>
Developing economy market moves: EMMV <GO>
--With assistance from Kyoungwha Kim in Hong Kong.
To contact the reporter on this story:
Kana Nishizawa in Hong Kong at +852-2977-4627 or
knishizawa5@bloomberg.net
To contact the editors responsible for this story:
Sarah McDonald at +61-2-9777-8684 or
smcdonald23@bloomberg.net;
Michael Patterson at +852-2977-4820 or
mpatterson10@bloomberg.net
Chris Nagi