The case can now be made that the high for the cycle for the A-share markets was earlier this month. We set a new mid-2016 Shanghai Composite Target Price range of 3,250-4,600 (-30% to -2% from the
June 24 close), down from our prior end-2015 Target range of 4,000-4,800).
Our stance on China A shares is that this is probably not a dip to buy. In fact, we think the balance of probabilities is that the top for the cycle on Shanghai, Shenzhen and Chinext has now taken place. (This is in contrast with our view at the time of the January correction in A shares (China Strategy: China A shares: Not the end of the bull run [20 Jan 20, 2015]). We remain concerned over four factors: a) increased equity supply, b) continued weak earnings growth in the context of economic deceleration, c) high valuations, and d) very high margin debt to free float market capitalization. Our Shanghai Composite Index EPS forecasts for 2015 and 2016 are significantly lower than consensus (5% vs. 9% for 2015, and 8% vs. 16% for 2016). Our study of 34 prior major EM equity market bull runs also shows that strong equity market performance tends not to be associated with subsequent GDP growth improvement (observed in only seven cases), counter to the argument often made that the market is likely to lead a strong economic recovery. We retain an EW recommendation on MSCI China for the APxJ / EM benchmarked investor. Our HSCEI Target is 15,000.
China A Shares – Probably Not a Dip to Buy: New Shanghai Composite Target Range of 3,250-4,600 for mid-2016