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China bulls cash out as stocks overshoot by most worldwide

[SHANGHAI] After watching Chinese stocks surge 37 per cent in just three months, some of the world's biggest banks are souring on the booming market.

Citigroup became the latest to cut its outlook on Jan 12, lowering its rating to neutral from overweight amid concern valuations are turning unattractive. The downgrade follows predictions in the last two weeks from HSBC Holdings Plc, Bocom International Holdings and UBS AG that gains in mainland- listed shares will falter. The Shanghai Composite Index closed yesterday at 3,235.30, or 7 per cent higher than where analysts tracked by Bloomberg predict the gauge will be in 12 months, the biggest gap among global equity measures.

China's US$5 trillion stock market is losing momentum after a world-beating rally sent the benchmark index to the highest since August 2009. Overseas investors have become net sellers of mainland shares through the Shanghai-Hong Kong exchange link, while new stock account openings dropped 38 percent from their December high and turnover on the Shanghai exchange declined to a seven-week low today.

"In the short term, the upside will be limited because the rallies have been too fast and too much," Chen Li, the chief China equity strategist at UBS, said in a Bloomberg Television interview from Shanghai on Jan 12.

Local investors may also be overly optimistic about the potential for households to shift funds from the property market to equities, while the slowing economy and sluggish earnings growth don't support extended gains in stocks, wrote Jason Sun and Minggao Shen, analysts at Citigroup.

Index Targets The CSI 300 Index of the nation's largest companies will climb about 5 per cent through year-end, compared with last year's 52 per cent surge, and behind a projected 13 per cent advance for the MSCI China Index of mostly Hong Kong-traded equities, according to Citigroup.

The outperformance of China's domestic stocks versus Hong Kong peers has prompted HSBC and Bocom to be cautious. Dual- listed shares were 27 per cent more expensive on the mainland as of yesterday, according to the Hang Seng China AH Premium Index.

The rally in so-called A shares appears "long in the tooth," Stephen Sun, the head of China equity strategy at HSBC, which had been bullish on mainland stocks since April, said in a note dated Jan 8. Bocom International strategist Hao Hong, who advised investors to buy Chinese shares in September, now sees the risk of a "correction." The Shanghai Composite fell 0.4 per cent to 3,222.44 at the close, its lowest in two weeks. The MSCI China slid 0.5 per cent.

Stock Valuations The Shanghai index traded at 12.1 times 12-month projected earnings yesterday, 16 per cent above its average over the past five years, according to data compiled by Bloomberg. The MSCI China had a multiple of 9.7, near its five-year average of 9.9.

Mainland-traded shares of PetroChina, China's biggest company by market value, were 35 per cent higher than analysts' average 12-month price target yesterday. China Railway Group was 78 per cent more expensive than the consensus prediction.

Valuations aren't too high for Christie Ju, the Hong Kong- based head of Hong Kong and China equity research at Jefferies Group, who predicts the Shanghai Composite will climb an additional 25 per cent this year as the central bank eases monetary policies and the government enacts plans to open up state-owned enterprises to private capital.

New Accounts For Wu Kan, a fund manager at Dragon Life Insurance in Shanghai, analyst forecasts aren't a useful predictor of where equities are heading.

"I don't pay too much attention to brokerage reports," Mr Wu said. "We look more closely at what the market is doing." The rally may already be faltering. The Shanghai Composite has fallen 4.1 per cent from its Jan 7 high through yesterday, while investors opened some 551,000 accounts to trade equities last week, down from 892,000 in the week to Dec 12. The value of shares traded on the Shanghai exchange has dropped 66 per cent from its record on Dec. 9 and foreign investors were net sellers of A shares yesterday for a second day, the first back-to-back outflows since the link with Hong Kong began in November.

"The stock market's turnover in recent days has declined, reflecting a more cautious mood," Bocom's Mr Hong said in e-mailed comments yesterday. "Valuations of A shares are around the world average after the sharp rally since November and are no longer outright cheap."

Bloomberg