Analyst who called China stock rally now warns of mediocre returns in 2020 on property, export slowdown

Zhang Shidong

Investors should be prepared to accept a poorer return from Chinese stocks next year because economic growth remains sluggish and the prospects of fresh portfolio inflows are unclear, according to an analyst who correctly predicted the swings on China’s market this year.

Property investments and exports, which have contributed more than 40 per cent of China’s growth this year, are likely to face challenges, Chen Li, chief economist at Soochow Securities, said at a conference in Shanghai on Tuesday. Foreign investors who helped fuel this year’s advance may be holding back because MSCI has yet to announce if it will continue to raise mainland-traded stocks in its global gauges in 2020, he said.

“We are cautious about stocks next year and do not expect returns to be high,” Chen said. “If you are able to make a 10 per cent gain from stocks next year, that would probably put you among the top-performing investors.”

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Chen forecast in January that the first quarter would be the best time to load up on Chinese equities this year, adding that the market would falter thereafter because of a slowdown in the economy. The benchmark Shanghai Composite Index surged 24 per cent through March 31, and has since lost 5.9 per cent from that point.

China’s efforts to squeeze more growth out of property investments and exports are showing signs of strain, with the economy growing at the slowest pace since records began in March 1992. Leverage incurred by Chinese households are already elevated and crimping consumption, while a prolonged trade war with the US has damped external demand, Chen said.

The economist is cautious on consumer stocks, one of the best-performing sectors in 2019. The central bank is unlikely to trim its benchmark interest rate before March, shackled by surging pork prices, he said.

“There’s still a short fall of pork supply and inflation will continue to accelerate,” Chen said. “The central bank still needs to watch the full impact of rising pork prices.”

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Shares of liquor distillers are likely to suffer in current downturn, Chen said. Most of them traded at above 30 times earnings, and those valuations may not be sustained “once revenues and profits fail to meet expectations.”

He recommends companies linked to the fifth-generation or 5G technology as well as manufacturers of electric cars and photovoltaic firms, whose businesses are set to recover, without mentioning specific stock.

He is bullish on China’s 10-year sovereign bonds, saying the yields will drop on expectations policymakers will cut their target for economic growth as the current five-year policy plan ends in 2019. Growth was 6 per cent in the third quarter, just meeting the lower end of the range of the official target, official data shows.

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