Shanghai Stocks to Rally 20% by Year-End

From concerns over a hard landing to fears over stagflation, investors have found plenty of reasons to stay far away from China’s share market recently. The Shanghai Composite has fallen 3 percent so far this year, a lackluster performance for one of the fastest growing economies of the world.


But, HSBC’s head of China equity strategy, Steven Sun, believes that’s about to change. The bank is forecasting a 20 percent rebound for the mainland benchmark by year-end.

It’s a change from the bank’s bearish view in November last year, when it warned that the central bank was behind the curve on monetary policy. The bank is now forecasting an acceleration in money supply growth, which will boost equities.

“The ultimate catalyst is the end of the tightening cycle. That will lead the market to turn a corner,” Sun told CNBC. He’s forecasting money supply growth will go back to 17 percent from the current 13 percent.

There are already some signs of improving sentiment in the market. HSBC says insiders and overseas investors are buying more shares. Insider buying went up to $200 million in May from $52 million in April.

State-owned companies Datang Power, COSCO and Shenhua Group have recently announced increases in shareholding plans, a sign of increasing optimism. Under such plans, a parent company increases its ownership of the operating company.

Some major firms have also announced share buybacks in recent months. For example, the world’s largest coal company, China Shenhua announced a buyback of 10 percent of its outstanding shares in the Hong Kong and Shanghai markets in April.

Sun says the current round of buybacks is similar to activity that took place during the 2008 market bottom.

For overseas investors looking to gain exposure to mainland equities, HSBC recommends subscribing to mutual funds that invest directly in the A-share market, particularly those that are currently trading at a discount to their net asset value (NAV). Some of these include the HSBC China Dragon Fund, Morgan Stanley China A Share and AMP Capital China Growth.