Analysts urge caution on Chinese market

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Analysts urge caution on Chinese market


The recent uncertainty in the Chinese stock market has deepened investors’ anxiety. After the Shanghai Composite Index tumbled to below 3,400 last week, the Kospi also broke the 2,000 barrier for the first time in four months. Although the Shanghai exchange recovered to above 3,900 on Monday, it is still hard to predict whether the fluctuations will persist.

Six major brokerage houses in Korea have tentatively concluded that the worst is over for both the local and Chinese bourses.

“The Chinese market passed the ‘climax of panic’ last week and the additional fall won’t be huge,” said Lee Chang-mok, head of research at NH Investment & Securities. “The ‘sell’ mood in the Chinese market appears to be gone.”

But analysts are also pessimistic about the speed of a rebound. It will take time before the Chinese market, the source of the ongoing stock market chaos, stops fluctuating and sees the frozen investment sentiment thaw.

“The Chinese government is exerting every effort to protect its market with a trail of pump-priming policies,” said Lee Joon-jae, head of research at Korea Investment & Securities. “The downward trend has halted thanks to the effort but it is still too early to launch an aggressive investment.”

He noted what happened 10 years ago as a lesson for investors. The Shanghai Composite Index began at 1,000 in June 2005 and shot up to 6,124.04 in just two years. But then it nose-dived abruptly and remained in the 2,000 band for the next seven years.

“We need to be very conservative about the Chinese market, given there still is huge room for variability,” said Shin Dong-seok, head of research at Samsung Securities. “Rebound isn’t predicted until after the second-quarter corporate results are made public, given the simple factor of ample liquidity won’t necessarily contribute to raising stock prices,” said Lee Sang-wha, head of research at Hyundai Securities.

Yang Ki-in, the head of research at Shinhan Investment, recommended that investors wait until the impending variables are neutralized rather than embracing the uncertainties by choosing to buy at low price.

Analysts came up with mixed views on the prospect of the Korean stock market. Lee of Hyundai says the domestic market is highly likely to fluctuate for the time being in the aftermath of the bad situations in China as well as Greece.

Many of them came up with 1,950 as the bottom line for the Kospi. KDB Daewoo Securities was the most pessimistic with 1,850, whereas Korea Investment & Securities was more optimistic with 2,000. The Kospi ended 1.5 percent up at 2,061.52 Monday.

Should investors decide to take the occasion as a chance to purchase at a low price, they are advised to opt for the secondary Kosdaq and smaller companies instead of the main Kospi and larger corporations. The Kosdaq shot up 34.6 percent in the first 10 months of this year, while the Kospi has risen a mere 6 percent - largely due to the aggravated performance of conglomerates and large corporations.

Shin of Samsung claims it’s time that the Kospi and large companies see their stocks rebound.

“Investors’ preference for the Kosdaq and smaller stocks will be weakened gradually,” he said. “As economic recovery is visible in the United States and Europe, investors are advised to raise the ratio of under-evaluated large stocks in their portfolios.”

Lee of Hyundai says medium- and long-term investors are recommended to start purchasing stocks when the Kospi reaches 1,980. Ahn Byung-kook, head of research at KDB Daewoo Securities, advises investors to remain conservative about investing in large, export-oriented stocks as long as the risk factors from Greece and China persist. Yang of Shinhan also said the Kosdaq would rise more quickly than the Kospi or large stocks once external conditions improve.

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