In China the latest investor frenzy is speculating on the stocks of the country’s state-owned enterprises.
What began as a rally in state-controlled banks, has now spread to brokers and filmmakers, as investors bet on state-support for government-owned entities reinvigorating a market where new growth concerns are haunting investors.
One index which tracks a number of China’s largest state-owned enterprises increased by up to 1.2% on Tuesday, to its highest reading in 15 months. Some of the biggest gainers were China International Capitalist Corp., China Film Co., and Qinhuangdao Port Co., all of which reached the 10% trading limit.
Although some analysts believe the government’s promise to widen funding access for state companies is the primary motivator, others argue that the latest gains are looking more like investor exuberance, without any underlying support in the fundamentals. Chinese stock trading has been known for producing trading frenzies among financial assets.
Kakei Lam, fund investment officer at Metaverse Securities in Hong Kong said, “Technically speaking the rally is definitely not healthy, as the fundamentals of the sector haven’t really changed much. Investors should be careful of profit taking in the short term.”
The most recent gains were accompanied by a surge of trading volume, indicating a rally driven more by momentum than fundamentals. CSI 300 Index volume on Monday was the largest since June.
Options activity was also elevated on Chinese banks listed in Hong Kong. Bank of China Ltd.’s options on Monday saw trading volume that was roughly eight times its 20-day average, with twice as many call options as puts. The option which was most heavily traded on the stock was a bet that the bank’s share price would hit at least HK$3.6 compared to the current HK$3.4 by the end of this month.
Although several Chinese banks have cut deposit rates recently, and that has made the banking sector more attractive to investors, the industry as a whole has seen weak first-quarter earnings,, and it is facing deeper problems with margins.
However some analysts are still bullish on the rally.
Morgan Stanley analysts Jonathan Garner and Laura Wang wrote a note on China’s locally traded shares which said, “We think the A share market will lead in the next phase of the bull market in Asia. Price action in the aftermath of the Golden Week holiday is encouraging. There was particular strength in financials and other SOE stocks.”
