Sell China shares, says top forecaster
For one, the Shanghai Composite Index’s valuation is above its long-term average, even after a 41% drop in the benchmark gauge since mid-June.
Government efforts to bolster the yuan will drain market liquidity, Mr Hong says, and plummeting equity volumes suggest investors lack faith in a rebound. He rejects the notion that targeted economic stimulus is enough to revive the bull market.
After distinguishing himself as one of the few forecasters to predict the start and peak of China’s equity boom, Mr Hong is once again breaking ranks with peers as mainland markets resume trading after a week-long holiday.
He says the Shanghai Composite needs to fall 18% to 2,500 before it is cheap enough to buy, while the average estimate from eight other strategists compiled by Bloomberg implies a 12% rally by year-end.
“I still think it’s better to sell into highs rather than buying dips,” said Mr Hong, the chief China strategist at Bocom in Hong Kong. “The government has succeeded in curbing market volatility. But volume is dying, too.”
Mr Hong turned positive on Chinese stocks in September 2014, saying government support for the market meant it was “time to throw our senses out of the window”, ignore weakening economic data and buy on dips.
The Shanghai Composite more than doubled from the time of Mr Hong’s recommendation through its June 12 peak.
In a June 16 interview with Bloomberg Television, Mr Hong said China’s stocks were heading for a “notable crash” after entering a bubble. The equity gauge plunged 40% from that date through its low on August 26.
Even after the rout, the Shanghai Composite is valued at 15.3 times reported earnings, compared with its three-year average of 13.
The median stock in the index, where low-priced banks have some of the biggest weightings, trades at 49 times profit, the highest level among benchmark gauges in the world’s 10 biggest markets.
While volatility in the Shanghai Composite fell to the lowest level in three months before the holiday, the decline has coincided with an 88% drop in turnover from its June peak.
The Shanghai gauge rose 3% at the close yesterday, following gains in overseas markets. The Hang Seng China Enterprises Index, which jumped 11% during the mainland holiday, declined 1%.
The Shanghai Composite will climb to 3,418.75 by year-end, according to the mean of strategist estimates compiled by Bloomberg.
