Stock market becomes increasingly polarized
By Sun Min (China Daily)
Updated: 2004-09-02 10:07

The main tune of the Chinese economy in 2003 was fast growth, but in 2004 the situation is changing. Macroeconomic control measures by Chinese authorities to cool down the economy have changed the market expectation of the growth of many industries and also made individual stock picks more important than the assessment of an overall industry, a report by Boshi Fund Management Co says.

The market has become more polarized after the market correction in the first half year. Some stocks - including auto stocks - have tumbled in the correction, partly as a result of the economic controls, the report said.

And some investors may have neglected the real investment value of stocks and speculated for short-term gains. But in the long run, listed companies with good internal value will still be most promising.

A fund manager with Boshi said that the market risks have been much digested after the correction and the macroeconomic management has taken effect.

"In the second half of the year, we will maintain value-oriented investment ideology and study the sustainable competitiveness of listed firms. Those with expected steady cash earnings and performance growth will be our major target," he said.

The Chinese economy, with a staggering 9.1 per cent growth in 2003 and 9.7 per cent in the first half of this year, is striving for a soft-landing after the fast expansion.

The authorities therefore took a series of measures to control the growth, including a 0.5 percentage point increase of the reserve requirements for commercial banks in April, tighter credit supply and curbs on investments in overheating sectors like steel.

Market expectations of an interest rate hike also triggered a fall in the stock market in the second quarter and the impact is expected to linger.

The development model of the Chinese economy is shifting towards energy-saving and environment-friendly from high pollution and high energy consumption, the Boshi fund manager said.

Then, companies that are more innovative and focusing on core business development are expected to be more valuable.

There is unlikely to be a strong and steady market rally in the short term because of the interest rate hike expectation, but some individual companies with solid corporate governance, innovation and effective cost control will brew good investment opportunities, he said.

Feng Tiange, a fund manager with Guotai Fund Management Co, said that the stock market has very little room for further slide after the latest round of correction. Some A-share companies have already become heavily underpriced and their investment value is obvious.

Fund managers also noted that companies in the bottleneck industries, including power and energy, and consumer goods are more preferable investment targets because of their growth potential in the short and medium term.

The price/earnings ratio of Chinese stocks is already averaged at around 26-27 times and the ratio is even lower for some blue chip stocks, a researcher with the Southern Fund Management Co said.

The macro management measures to cool down the economy are expected to slow down the economic growth in China in the second half year, but instead of a sharp brake, it will only make growth more sustainable and the steady growth trend in the medium and long term will not be changed, he said.

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