China’s benchmark stock index, the world’s second-best performer this year, may extend gains as earnings recover and economic growth accelerates, Park East Capital told clients this week.
Pouring cold water on the prospect of Chinese stocks being in a bubble, Park East Capital wrote to investors on Monday, saying that China’s recovery story is fundamentally sound and one of the strongest and most robust of the world economies.
The Shanghai Composite Index has doubled from its November low and investors last week opened the most trading accounts since January 2008, enticed by signs a 4 trillion yuan ($586 billion) stimulus package and record bank lending have revived the economy. The gains have sparked concern the government may act to slow the rebound.
Park East Capital analysts said they agreed that the Chinese government needs to be careful that state spending doesn’tfuel a bubble in the stock market, but countered by saying that they are still positive about Chinese stocks on optimism that rising domestic demand and the stimulus will lift growth to the government’s 8 percent target.
China’s manufacturing expanded in July for a fifth month, according to an official gauge. New loans tripled in the first half from a year earlier after the government eased restrictions.
Valuations of stocks on the Shanghai Composite Index have surged to 38 times earnings, more than twice those of the MSCI Emerging Markets Index and the Standard & Poor’s 500 Index and Park East Capital are confident that there is more upside potential on offer if there are sound underlying fundamentals.
The stock market revival has triggered an end to a nine- month moratorium on domestic IPOs in June. The five companies that went public since then gained an average 112 percent on their first day of trading, even after selling stock at the top end of ranges marketed to investors. Shares worth 55.6 billion yuan have been sold so far this year, according to data referenced in the Park East Capital release.
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