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Mobius To Beijing: Quit Fighting The Market And Let Stocks Fall
Perspective | 08 September 2015

How do you get a bottom-up stock picker, a chart watcher and an economist to agree? Try asking them about Chinese equities.

Mark Mobius, Tom DeMark and George Magnus – world-renowned forecasters who view markets through three very different lenses – are all finding common ground with their predictions that Chinese shares have further to drop.

They say government efforts to prop up the US$5.1 trillion market are futile, a view that’s gaining traction among analysts after an unprecedented two-month rescue effort failed to spark a sustained rally.

“I’d expect the government to be reducing intervention,” Mobius, the Franklin Resources money manager who has been investing in emerging markets for more than four decades, said in an interview in Hong Kong on 4 September. “They realise it’s not working.”

Authorities may be more receptive to declining share prices now that the country’s World War II victory parade – seen as a platform for President Xi Jinping to project China’s strength on the world stage – has passed without incident.

Source: Bloomberg

The benchmark Shanghai Composite Index (SHCOMP) will probably drop another 18 percent to 2,590 before prices bottom out, DeMark, who has spent more than 40 years developing indicators to identify market turning points, said in an interview on 31 August.

Magnus, a senior independent economic adviser to UBS Group, says the government needs to allow the gauge to slump to between 2,500 and 2,800.

Bearish Positions
“China should have seen how futile their intervention is,” said Cedric Ma, a Hong Kong-based senior investment strategist at Convoy Asset Management. “The government will let the markets continue to correct.”

Traders are positioning for further downside in the options market, where bearish contracts on the mainland-listed China 50 ETF climbed to the most expensive level on record versus bullish ones last week. In the US, an exchange traded fund designed to make money when Chinese shares fall has recorded a 60-fold surge in assets since June.

Foreign money managers have sold Shanghai equities through the city’s cross-border exchange link for four straight days, bringing outflows since 3 July to US$4.9 billion. Valuation gaps between dual-listed shares are approaching the widest levels since 2009, a sign that international investors in Hong Kong are even more pessimistic than their mainland counterparts.

“The China market is still viewed as over-valued,” said Andrew Sullivan, the head of sales trading at Haitong International Securities Group in Hong Kong. “Because of the government intervention, it hasn’t had a real clear-out.”

Market Stabilisation
Chinese authorities intervened in the stock market on 27 August to stabilise prices before the 3 September military parade, according to people familiar with the matter. Signs of support persisted through last week as large-capitalization companies – favoured targets of state-linked funds – rallied toward the end of each trading session.

The SHCOMP still ended the week with a 2.2 percent drop. The Hang Seng China Enterprises Index of Hong Kong-listed shares retreated 6 percent, while the Bloomberg China-US Equity Index slid 8 percent.

Even if the government pares back direct intervention, it still has plenty of market-friendly ways to support the broader economy, according to Bruce Yu, a money manager at Franklin Templeton SinoAm in Taipei. Policy makers may increase fiscal spending and push ahead with plans to make state-owned enterprises more efficient, he said.

Japan’s experience in the 1960s shows state support measures can work, according to Paul Sheard, chief global economist at Standard & Poor’s in New York. Japanese authorities helped set up rescue funds to buy equities after a big selloff in 1963. Shares ultimately rebounded and economic development continued.

China’s intervention prevented systemic risk and stopped the free-fall in equities, central bank Governor Zhou Xiaochuan said in a statement 5 September after a meeting by finance ministers and central bankers from the Group of 20 nations. Declines in shares are almost over and financial markets are expected to be more stable, he said.

Source: Bloomberg

For Alex Wong, a Hong Kong-based asset-management director at Ample Capital, Chinese stocks are still too expensive to lure non-state investors.

Equities on mainland bourses traded at a median 45 times reported earnings last week. That is the highest among the 10 largest markets and more than twice the 18 multiple for the Standard & Poor’s 500 Index. The SHCOMP, where low-priced banks have some of the biggest weightings, has a ratio of 16.

“It wouldn’t be surprising to see another 5 to 10 percent fall during big volatility this week,” Wong said. The government “can’t buy stocks forever,” he said.

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