Shanghai continued moving South this week as I’d expected for the following primary reasons:
1) Less credit – Caijing magazine expects CNY200bn of lending this August, compared with CNY355.9bn in July, and a staggering CNY1.53tr in June.
2) Reduced company earnings – for example Baoshan Iron 1H09 profit decreased 93% to (CNY669m) as shipbuilding and car manufacturer continued to be hit globally. The company said that “foundations for a domestic recovery are not solid.” China Southern Airlines (China’s largest carrier) 1H09 profit decreased 97% to CNY25m.
Good news is that the index is now trading at a 29.2x p/e compared with a high of 38.75x on 4 August. This compares with 19x for the MSCI EM index. Nonetheless with potentially higher growth prospects in 2010+ than other countries Shanghai certainly deserves to trade at a higher thatn MSCI EM overall.
Goldman Sachs consider China a ‘bright spot’ in equities, and focus on that growth potential in 2010 and beyond. GS sees the Government remaining pro-growth. In addition, Baoshan remains one of GS top ten picks for China. In fact of 35 analysts polled, 30 recommend a buy/add/overweight for the stock, with an average Target price of CNY9.33 (a third above today’s close).