Zhang Shibao covers 12 Chinese stocks and recommends investors buy all of them, even after they’ve more than tripled on average in the past year.
“We are still in the middle of the bull market and the uptrend is irreversible,” said Zhang, a steel analyst at China Merchants Securities Co. in Shenzhen. Analysts who cover Chinese companies, such as Zhang, are the most bullish they’ve been at any time in the past 10 years. Total buy calls on mainland shares from local and foreign analysts rose to 67.4% of all ratings this month, the highest since Bloomberg began collating the data a decade ago. The bullishness comes as the government is trying to cool a rally that’s made shares there the most expensive in Asia.
Zhang has eight “strong buy” and four “buy” recommendations on the 12 iron and steel stocks he covers. They have gained an average 218% over the past 12 months and are up 97% this year, according to Bloomberg calculations.
Shares of Shanxi Taigang Stainless Steel Co., China’s biggest maker of the corrosion-resistant metal, have leapt 355% over the past year, while Wuhan Iron & Steel Co., China’s third biggest steel maker by market value, have almost quadrupled. Nine of 10 analysts who cover Shanxi Tiagang rate it a buy, while 10 of 18 recommend buying Wuhan Iron & Steel, according to Bloomberg data. Zhang has “strong buy” ratings on both stocks. Sell calls make up 10.3% of all ratings, the lowest proportion on record, and hold ratings comprise 22.2% of the 12,301 recommendations on Chinese stocks tracked by Bloomberg.
That’s even after the government had on 30 May tripled a tax on securities trading and the central bank twice raised interest rates this year in failed bids to cool the rally. At a weekend meeting of central bankers in Basel, Switzerland on 23 and 24 June, People’s Bank of China governor Zhou Xiaochuan said he can’t rule out raising rates again to curb inflation and the booming stock market, and is worried shares are too expensive.
China’s stock brokers have never had it so good. Individual Chinese investors are opening brokerage accounts at the rate of about 300,000 a day this quarter, helping the CSI 300 Index almost double in 2007, the second biggest gain among 90 benchmarks tracked by Bloomberg behind Ukraine’s PFTS Index. The index is valued at 43 times reported earnings, about twice as much as Japan and India, Asia’s next most expensive markets.
The finance ministry had on 30 May tripled its tax on securities trading to 0.3%, while the China Banking Regulatory Commission this month fined six banks for granting loans it said were illegally used to finance speculation in the stock and property markets. In addition, the central bank has raised interest rates twice this year and ordered lenders five times to set aside more money as reserves to curb lending.
The CSI 300 recouped a loss of as much as 22% caused by the increase in stamp duty in less than two weeks. It took about a month to recover a single-day loss of 9.2% on 27 February, the biggest slide since the CSI 300 Index was introduced in April 2005. The crash sparked a global sell-off that wiped out about $3.3 trillion of stock market value.
Ping Jingwei, an analyst at Shanghai Securities Co., has buy recommendations on all seven stocks he covers, betting the inflow of new investors into the market will trump the government’s efforts to cool it.
“Many of the stocks are above fair value in my opinion, but I don’t put out a sell call because the market is now being carried along by momentum and liquidity,” he said. “I may think it’s worth $10 (Rs410), but if it’s now $15 and looks set to rise further, why would I put out a sell call? What if it keeps gaining? I’d look bad and it wouldn’t look good on my appraisal.”
Guangzhou Donghua Enterprise Co., a Guangzhou-based residential property developer, has risen 189% this year. Ping had put out a “buy” recommendation on 15 March. Shanghai Shimao Co., a real-estate developer that has climbed 361% in 2007, had earned a “buy” call from Ping on 18 January.
“I haven’t encountered any pressure from my company so far not to put out sell calls, but I think there will be if I do,” said Ping. “I avoid that by skipping companies that are not worth a buy. Instead of putting out a negative report, I’ll just not put out one at all.”
Investor Marc Faber has warned of a “bubble” in Chinese shares. Last month, former US Federal Reserve chairman Alan Greenspan and Li Ka-shing, Asia’s richest man, had made the same call.
“It is common for analysts to be most bullish near market peaks,” said Faber, who oversees $300 million in assets at Marc Faber Ltd in Hong Kong. “It is very difficult to contain bubbles with monetary measures only.” Still, he has said that Chinese shares could double. He doesn’t own any mainland Chinese shares.
By contrast, analysts in the US have never been so bearish. Buy ratings fell below holds as a percentage of total US stock picks for the first time ever in February, and now trail 45.3% to 47.8%, according to Bloomberg data. In 2003, 10 big Wall Street firms were ordered to separate investment banking from research to avoid conflicts of interest that tempted analysts to keep their reports upbeat. No such division exists among Chinese brokerages.
China doesn’t allow investors to sell shares they don’t own and buy them back later, a practice known as short selling. That leaves brokers more reliant on buyers for commissions. China “remains an inefficient market”, said Peter Alexander, managing director at Z-Ben Advisors Ltd, which does research on China’s investment management industry. Foreign and local institutional investors are better off doing their research internally, while retail investors often base their investment on “what’s the hottest tip on the street”, rather than broker recommendations, Shanghai-based Alexander said.
James Liu, who manages a $441 million China equity fund at Singapore-based APS Asset Management, said he sees overly bullish calls on Chinese stocks as a sign that the strongest gains are over. He now uses them as a contrarian signal, avoiding shares with a lot of buy recommendations.
His APS China A Share Fund is the second best-performing hedge fund in the world for the past 12 months, with a total return of 139%. APS relies on its own team of 10 investment analysts for research: seven in Shanghai and three in Dongguan, close to the factories in the Pearl River Delta manufacturing belt. APS plans to set up a third office in Beijing this year. “I prefer to dig for my own gold,” Liu said.