Will Year of the Goat bring out the market bulls in China?

CHINESE equities had a resurgence in 2014, driven primarily by improved domestic sentiment. Since mid-2014, the government, through the People's Bank of China (PBOC), has been taking measures to ease short-term interbank liquidity and lower the borrowing cost of companies, especially the small and medium-sized enterprises (SMEs). A rate cut last November confirmed to us that a new easing cycle was likely unfolding, when the PBOC announced it was lowering the one-year benchmark lending rate by 40 basis points to 5.6 per cent and the one-year benchmark deposit rate by 25 basis points to 2.75 per cent.

While we see reasons why Chinese equities could continue to perform well this year, we also believe it will be difficult to repeat 2014's strong performance. Stock valuations have come up, and the growth outlook for corporate earnings has not improved by as much. Additionally, margin financing has ballooned, reaching high levels, causing the government to impose some curbs recently. We believe the government could enact further measures to stop small investors from becoming over-leveraged and the market from becoming overheated.

Therefore, in our view, last year's strong market performance shouldn't lead investors toward unrealistic expectations this year.