China stocks coming in from the cold

Hong Kong - China’s speculative investors may finally be contemplating a return to stocks.

That’s according to JPMorgan Asset Management, which has been buying mainland shares in a bet that a real-estate lending crackdown and lower valuations will draw investors to equities, more than a year after a rout that wiped out $5trn in value.

Chinese shares are beginning to perk up, with the benchmark Shanghai index headed for its best month since March.

Investors spending borrowed cash drove the stock boom and bust last year, before fleeing to bonds, commodity futures and, most recently, real estate.

Average new-home prices in 70 cities surged the most in more than seven years in September amid a credit boom, Bloomberg calculations based on official data show. With at least 21 cities imposing curbs, the housing market is showing tentative signs of cooling, improving the relative attraction of stocks that are among the world’s worst performers this year.

"They’ve underperformed every other asset class for a period of time by a shocking margin," said Howard Wang, Hong Kong-based head of greater China for JPMorgan Asset Management, which manages about $1.6trn.

"The money that would have gone into property will find its way into equities."

Since the People’s Bank of China started easing monetary policy in November 2014, various Chinese asset classes have seen bouts of strong inflows, which often prompted regulators to step in to slow price gains - and investors to move their money elsewhere.

Even before that, regulators had to impose curbs to avert a potential housing bubble in 2011, and speculators have also targeted everything from garlic to certain types of tea.

After a string of Chinese cities imposed property curbs and measures limiting financing for developers, new-home prices dropped in the first weeks of October in Beijing and Shanghai.

The Shanghai Composite Index is up 3.7% this month and rose on Tuesday to the highest close since January, even as the yuan extended declines to a six-year low and the cost of borrowing short-term funds in China’s money market jumped.

Speculative investment

"If you don’t let me buy property, but I have a lot of money, some people speculate - and we agree - people will just put it back in the stock market," said Kevin Leung, director for global investment strategy at Haitong International Securities Group in Hong Kong. "It’s underperformed all markets."

Analysts at Citigroup Inc. also say the property curbs will buoy stocks. It’s a good time to buy shares in Chinese brokers because households will move funds to equities as housing measures tighten and bond prices are likely to peak, the US bank said this month.

China’s 10-year sovereign debt yield fell to a record low just last week, while the Shanghai Composite is trading at price-to-earnings ratio of about 18, down from 25 at its peak last year.

Likely inclusion in MSCI’s benchmark measures next year will also draw more foreign funds, according to Haitong’s Leung. The index firm said last month it’s continuing to monitor whether to add mainland shares to its gauges.

'Entrenched disbelief'

Some analysts doubt that interest in shares will return. Homes and stocks are not interchangeable, said Hao Hong, chief strategist at Bocom International Holdings Company in Hong Kong, who predicted last year’s equity boom and bust.

Economists are also seeing receding chances of aggressive monetary stimulus, which sparked the 2015 stock rally, and turnover in China’s two public equity markets remains tepid.

"There’s an entrenched disbelief in the stock market," said Hong. "If you ask me what it’s going to take for people to go back, I would say a sustainable recovery. When the momentum comes back, people will chase it."

For JPMorgan Asset Management’s Wang, the key is for the government to cool the property market - but just by a little. It may take three to six months for a strong equity rebound to begin as investors assess the impact of the housing curbs, he said.

"If we end up in the base case, which is that liquidity dries up, i.e. volumes fall, but you do not get a major price correction, it may end up redirecting liquidity into equities," he said, referring to a decline in the number of housing transactions.

"If they get it wrong and cause a huge correction, then all bets are off. Then money will come out of a lot of the asset classes."