Upside in the world’s top-performing stock index puts it on path to break this year’s high as China turns on the liquidity taps

10-Sep-2019 Intellasia | | 7:51 AM Print This Post

Stocks in the world’s best-performing market of the past month have more room to gain, as China’s monetary authorities turn on the tap to inject more liquidity into the economy and financial system, according to a forecast by the country’s largest public traded broker.

The Shanghai Composite Index may rise by at least another 8 per cent from Monday’s close of 3,024.74, which would put it in the position to surpass the year’s record set in April, according to Citic Securities’ analysts led by Qin Peijing.

“With the expectations about improvements in policies and corporate earnings, an expansion of valuations will open up more room for an upside on the index,” the Citic analysts said in a report on Monday.

China’s financial markets are cheering, after the People’s Bank of China on Friday cut the money that banks must set aside by 50 basis points for all bankswith an additional full percentage point for city commercial lendersand released an estimated 900 billion yuan (US$126 billion) of funds into the financial system to quench the thirst of highly leveraged borrowers and an economy whose growth pace is expected to slow to the worst annual pace on record.

The Shanghai Composite has gained 9 per cent over the past month, making it the best performer among the world’s major stock markets, on expectations that the government will roll out more pro-growth policies while the fallout of the US-China trade war has been priced in. The index rose 0.8 per cent at the close on Monday.

The liquidity taps are likely to remain loose, with the central bank cutting the rate on medium-term lending facilities a major funding source for commercial lenders by between 10 and 15 basis points in the next few weeks, Citic’s analysts said. The rate on the medium-term lending facilities is now a key gauge in deciding the loan prime rate in a revamped by the central bank last month.

Global fund managers will keep adding their holdings of Chinese shares, with FTSE Russell and S&P Dow Jones Indices adding the stocks to their benchmark indexes, Citic said.

The additional liquidity will also be a salve for the corporate earnings of Chinese companies, whose growth pace may accelerate to 10.4 per cent next year, from 6 per cent this year, Citic said.

The year-long US-China trade war is no longer a factor that will significantly affect sentiments going forward, as investors are already getting used to the conflict, the brokerage said.

Beijing and Washington DC will return to the negotiating table next month to restart a new round of talks to break the impasse.

On top of finance and consumer stocks, Citic Securities recommends buying household appliance makers, carmakers and pharmaceutical retailers, whose earnings are expected to improve in the second half, without naming any specific stock.


Category: China

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