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Stock market gives investors holiday cheer

(China Daily)
Updated: 2009-01-31 10:15

SHANGHAI: Apart from family and friends, Chinese investors have at least one more to be grateful for during the Chinese New Year holiday - the stock market.

The leading indicator, the benchmark Shanghai Composite Index, bucking the overall trend on Wall Street, has seen gains of 9.3 percent through the first month of 2009, indicating that a long-anticipated rebound is ahead.

"The outperformance of A shares coming into 2009 is largely attributed to proactive government policies to stabilize the economy and fairly relaxed liquidity in the market," said Wu Feng, an analyst with TX Investment Consulting.

Indeed, on the domestic front, persistent policy efforts from the fiscal stimulus package to specific measures to boost the automotive and steel sectors have boosted market enthusiasm.

In addition, the recovery of the broad and narrow measures of money supply, M2 and M1, through December also implied an increase in liquidity arising from a more relaxed monetary policy.

The growth rate of M2, following six consecutive monthly declines, rose 3.02 percentage points in December from the previous month, while M1 was up 2.3 percentage points.

"The turnaround in M1 reflects that companies' willingness to do business has been revived," Wu said.

As there remains room for further cuts in the benchmark lending and deposit rates, we expect a further rise in M2, which implies a sufficient capital supply to the market, said Yan Ji, an investment director at HSBC Fund Management Co Ltd.

However, worsening corporate earnings and the faltering domestic economy will continue to put pressure on the country's stock market, despite the generally upbeat long-term prospects for A shares.

As of Jan 20, among the more than 670 listed companies that had posted their preliminary earnings reports, 60 percent were projecting profit declines or losses in 2008, distinctly higher than the figure of 20.67 percent in 2007.

"Worse-than-expected corporate performance amid rising stock prices and dynamic price/earnings (P/E) ratios indicates a market correction in the short term," said Liu Jiwei, an analyst from Pacific Securities.

"We forecast that the growth rate of corporate earnings will slide to minus 10 percent in 2009, from positive growth of 3 percent in 2008," Wu said.

Yan also expressed his concerns regarding companies' performance, saying that earnings among industrial companies will continue to slide in 2009.

"The rebound may come when companies' de-stocking process ends and the highly effective fiscal easing passes on to the real economy in the second half," he said.