China Stocks Rebound Seen Fleeting as Liquidity Fears Linger On

(Bloomberg) -- The dust may be settling on the recent rout in the world’s second-largest stock market, but any rebound could prove fleeting in the wake of liquidity tightening risks and frayed nerves of battle-weary investors.

While China’s CSI 300 Index capped its first quarterly drop in a year, it has risen 4.8% from a low in March. A Bloomberg survey of 19 fund managers and analysts shows the index will end the June quarter lower. That’s set the tone for the overall market -- a state of limbo, trapped in a horizontal range as investors ponder the shrinking liquidity impact against the strength of business recovery.

“Relatively tight monetary environment and deceleration in new loans will continue to pressure valuations in the most expensive parts of the market,” said Zhang Haidong, a Shanghai-based fund manager at Jinkuang Investment Management. “This means its difficult for the index to climb much, though new lows are also unlikely amid an economic recovery.”

China’s CSI 300 was at the center of turbulence the moment it peaked at a 13-year high in early February. It has nose-dived since then, entering a technical correction in a brutal rout triggered also by expensive valuations. The measure is down 1% so far this year.

It has lagged a broader index of emerging-market stocks for five straight months, with the 5.4% loss in March making for the biggest relative underperformance since 2016.

Bloomberg survey details:

• The CSI 300 is expected to reach 4,950 at the end of the second quarter, implying a 4% drop from Friday’s close
• The Shanghai Composite Index is seen to reach 3,400 points or falling about 2% from the close
• The ChiNext index, a gauge of small-cap stocks, may slip further by 12% to 2,500 points
• Financials and consumer stocks picked as the sectors most likely to outperform

Liquor Heavyweight

Hopes are waning that the market will get a lift from the biggest mainland stock Kweichou Moutai Co., the archetype of the momentum-driven gains that propelled the benchmark to near record-highs in February.

Moutai, which has the largest weighting on the CSI 300, may fall another 19% to 1,750 yuan before looking attractive enough for dip buyers, according to the survey’s participants. It’s down 17% from a peak in February after seeing its best day in seven weeks on Friday.

Momentum of stocks like Moutai that emerged as investor darlings amid the pandemic last year has faded quickly as less ample liquidity, frayed U.S.-China ties and bloated valuations in some sectors damped risk appetite. The pace of overall selling in the market however, has weakened with daily average turnover in the two exchanges declining for six weeks.

“I’m not expecting a turnaround in stocks overnight or for the institutional favorites to continue with their earlier trajectory within the first half the after a selloff like of these proportions, ” said Ou Xiao, a fund manager at Jiming Capital Co. in Shanghai.

Uncertainty over the strength of the economic rebound is another overhang. So far, corporate results point to a broader recovery. The ratio of companies reporting earnings beats in the final quarter of 2020 compared with a year earlier has risen, though to a lesser degree, according to a Morgan Stanley report March 29, after about 200 members of MSCI China Index reported earnings.

Shanghai and Shenzhen firms are required to report 2020 and first quarter 2021 earnings by the end of April. Companies with a weaker scorecard tend to report closer to the deadline.

“Often stellar earnings just reaffirm current valuations, and a beat here and there is not enough to carry stocks higher,” said Jiming Capital’s Ou. “The uptrend won’t be rebuilt in a day.”

©2021 Bloomberg L.P.