We understand that the Chinese market regulatory authorities are really keen to prop up (or talk up) the stock market. A lot have probably been done or said to be done about propping up the stock market, they even asked brokerage houses to look for some good reasons to tell clients to buy stocks, which is obviously very silly. When was the last time you hear a regulatory authority trying to tell people to buy stocks as if they were perma-bulls.Chinese stocks could have been oversold after making new lows after new lows, and could have been due to rebound. Back to the basic, however, Chinese companies have been doing very badly in terms of earnings, and we think that with such kind of economic structure where you have overinvestment across sectors and misallocation of capital, return on investment is bound to be low, so does corporate profitability. Is that really that surprising that stocks have not been performing even while economic growth has only slowed to 7.6% yoy in second quarter. In retrospect, no one should have been surprised, as the market has been overly optimistic about the economic growth and corporate profitability. It has nothing to do with short-sellers, or foreigners with ulterior motives. These companies are just not performing.
The sell-side consensus is gradually converging to the reality of mediocre profitability and slower than hoped economic growth. Earnings forecasts have been coming down significantly from the start of the year. Despite disappointing first half earnings, however, the market is still remarkably expecting earnings to rise for the full-year of 2012. The chart below from Société Générale’s Guy Stear shows that although the market has been revising earnings expectation downward since February this year, the full-year EPS growth forecast for full-year 2012 remains positive and double-digit.
Although Chinese earnings are now contracting in year on year terms, Chart 3 shows that equity analysts still expect them to rise for 2012 as a whole, by some 15%. Moreover earnings gains are still expected to accelerate in 2013, with the consensus calling for 22% median EPS gains next year.
The question for investors, of course, is not about what has already happened, but what is going to happen next. But is such expectation of strong recovery of earnings growth realistic?
This article originally appeared here: Is the market still too optimistic about Chinese corporate earnings?
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