27/05/2015 00:44 AST
Only in China can you predict the world’s biggest stock-market rally and still come out looking like a pessimist.
A year ago, analysts who cover the 50 largest companies trading in Shanghai and Shenzhen said equities were set to rally 28%. Turns out they weren’t anywhere near optimistic enough, as monetary easing and a buying frenzy among Chinese retail investors sent shares surging 111% through last week.
Analysts have been scrambling ever since, updating predictions, then re-updating them and re-re-updating them as stocks blew by their target prices. The rally that outran their forecasts is now making their jobs even more difficult as they try to assess the prospects of companies trading at multi-year highs with the possibility of further government stimulus.
“This market has been driven up by capital that’s flooded in, while you need to touch upon company fundamentals in your research notes,” Li Xiaolu, a Shanghai-based equity analyst at Capital Securities Corp, said by phone on May 13. “We can’t write baseless reports, so the current market makes it more difficult for us, and makes me hesitate. If a stock’s gain is beyond reasonable, it may continue to climb even if I cut its rating.”
Li is among the best performing analysts on at least 10 companies over the past year, including locomotive manufacturer CSR Corp, according to data compiled by Bloomberg.
With the Beijing-based company trading at 5.13 yuan, or 83 cents, in August, she called for a 21% gain, to 6.20 yuan, over the next year. She raised her projection to 7 yuan in October, and then 11 yuan in December and 18 yuan in March. The stock reached a record 35.88 yuan last month before ceasing trading as the company completes a merger with Beijing-based China CNR Corp.
Surging participation among individual Chinese investors is helping fuel the market’s breakneck climb. Individuals comprise about 80% of equity trading and stock accounts with non- zero balances are rising at the fastest pace since at least 2008, according to data from the China Securities Depository and Clearing Corp.
“There’s so much money in the market,” Li said. “It’s a bit embarrassing to re-rate companies at this point.”
No major company highlights the difficulties of forecasting in the current market more than China Railway Group. A year ago analysts expected a 12-month gain of 19%. The stock has surged 707%, boosting its market capitalization to 377bn yuan ($61bn), in line with some of the biggest US companies such as Hewlett-Packard Co and MetLife.
Collectively, analysts were forecasting gains of 28% for the FTSE China A50 Index in the span, the biggest expected return among 45 of the world’s major benchmark indexes. The gauge gained 0.9% Tuesday to close at 14,632.03, its highest level in seven years.
While regulators have taken steps to weed out speculators, they’ve also sought to expand the role of equity markets in helping companies raise funds as the government reins in credit expansion.
Beijing has accelerated reviewing companies’ applications for initial public offerings since April. More than 120 newly listed companies have started trading so far this year, almost matching the total for all of 2014.
Chinese authorities also began an exchange link between the Shanghai and Hong Kong bourses in November that has allowed international investors greater access to its domestic equity market.“The presence of a much larger pool of capital, domestic Chinese institutions as well as foreign institutions now that are willing and able to invest creates demand for those securities that wasn’t there before,” David Riedel, president of New York-based Riedel Research Group, said by phone May 13.
Bloomberg
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