Morgan Stanley says Chinese stocks are showing no signs of overheating that could result in repeat of 2015 sell-off
- An aggregate measure of China’s market sentiment now stands at 51, far from a reading of 80 that could trigger a meltdown, says Morgan Stanley
Chinese stocks’ world-beating rally has still some way to go and a repeat of the 2015 meltdown that wiped out US$5 trillion in market capitalisation is highly unlikely, according to Morgan Stanley research released on Wednesday.
Analysts at the US investment bank, led by Laura Wang, based the argument on a newly introduced aggregate gauge of nine metrics for the Chinese market, including trading values, new account openings and the number of stocks hitting daily limits.
Measured on a 0-100 scale, the reading is currently at 51, much below the 80 level that could trigger a sell-off, the report said. During the 2015 crash, the gauge rose to 100.
“We found such indicators useful in our analysis of the market cycle in 2015/2016,” said Wang. “The bull market is still ongoing. While market sentiment is clearly getting more excited, particular since Chinese new year, it has not yet reached what we’d consider overheating yet.”
While Chinese stocks have turned into the world’s best-performing market this year after a disappointing 2018, the rally has stoked concerns among investors whether the stocks have risen too quickly and if a major shake-out was in store.
The benchmark Shanghai Composite Index fell 1.1 per cent to 3,026.95 a the close on Wednesday, paring its year-to-date gains to 21 per cent.
Hong Kong and China stocks tread lower as investors worry over economic outlook
After Wednesday’s decline, only 14 per cent of the companies on the Shanghai Composite remain in overbought territory now, compared to 73 per cent last week, according to data compiled Bloomberg. The index tumbled 4.4 per cent on Friday after brokerages including Citic Securities recommended selling some of the stocks with biggest gains.
Leveraged buying, which was mainly blamed for fuelling a quick ramp-up in stocks that was immediately followed by sharp declines, still seems to be growing, but at a milder pace.
The outstanding balance of stock purchases with borrowed money from brokerages totalled 877.2 billion yuan (US$130.7 billion) as of Tuesday, about 60 per cent below the peak seen in 2015.
Morgan Stanley reiterated its overweight recommendation on Chinese stocks and a year-end target of 4,300 for the CSI 300 Index of big-caps in Wednesday’s report. That implies a further gain of 15 per cent from the index’s latest close.
