Concerns that the central government may introduce measures to control speculation in the domestic stock market in anticipation of the annual National People’s Congress meeting triggered the selloff.
China shares fell in February with the H share and MSCI China indices down 3.3% and 1.7% respectively. Concerns that the central government may introduce measures to control speculation in the domestic stock market in anticipation of the annual National People’s Congress meeting triggered the selloff. China financials underperformed the market on profit taking and the People’s Bank Of China’s decision to absorb excess liquidity by increasing the reserve requirement ratio by 0.5% to 10% just before the week-long Chinese New Year holiday. Commodity stocks went up in February on global price rebound.Investors’ focus remained on the newly listed IPOs.
Following the correction in February, the market will likely trade sideways until there is better clarity on government policy regarding possible measures to control property prices and excessive market speculation. Policy risk remains high over the short term. However, China’s strong economic fundamentals remain intact. The corporate income tax unification could translate into substantial tax reductions for many listed companies which in turn would boost corporate earnings growth. Further Renminbi appreciation, the expansion of the QDII scheme, corporate M&A and the implementation of management incentive plans are positive factors that would lead the market higher over the longer term.
The Hang Seng Index (HSI) dropped 2.3% for the month, with a sharp plunge around the end of February. The fall was triggered by the sell-off in the China A-share market, the reversal of Yen carry trade as well as a rebound in the emerging markets credit spread. Finance was the worst performing sector as its performance was dragged down by the bell-weather HSBC which issued a profit warning regarding the increased provisions on its US mortgage books. The property sector also underperformed due to profit-taking whilst utilities and commerce and industrial sectors fared relatively better.
Concerns over fund outflow and high market velocity will see the market entering into a consolidation period over the short term. As the underlying economic fundamentals continue to improve and stock valuations remain reasonable, any major correction would be a good buying opportunity. Positive management guidance in the forthcoming corporate reporting season will be the near-term catalyst for the market to resume its uptrend. We prefer property developers, retailers, hotels, selective industrials and China related stocks, while cautious on utilities, property investors and selective large cap banks.
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