There is little doubt that Shanghai stocks have been on a tear over the past 3 months having risen from 2,280 in October to 3,405 earlier this week. The index is back at 3,230 today but that is still a three-month gain of more than 36%.
But these gains, and those across the whole of 2014 which drove Shanghai stocks up 54% in USD terms, are unsustainable according to TD Securities Asia-Pacific Macro Strategist Prashant Newnaha.
Newnaha says that the much-hyped link with the Hang Seng has been a disappointment and offers five reason why stocks will pull back.
- New Account openings: Since mid-December, the volume of new A-share trading account openings has fallen sharply. Year-end would no doubt have played some part in slowing new account activity, but the pace at which new account openings have slowed suggests interest could be shifting away from the equity market.
- Renewed interest in property: Top property developers have reported a renewed surge in contract sales, up +25%/yr in November even though the PBoC rate cut was in effect for less than a week. The recent lifting of the Housing Provident Fund loan caps adds further to the view that government policy is increasingly targeted at timulating the housing sector. Sales data from developers that have reported December figures so far suggest that the surge continued into that month, normally a quiet period.
- IPOs are not performing: One of the reasons new A-share account openings surged was to participate in IPOs. However IPOs have not performed. Since peaking in the first week of December, Bloomberg’s IPO index is down 15%, in contrast to the Shanghai Composite up +11.5%.
- The Shanghai-HK stock connect has not been a success: The daily amount of buying into Shanghai is capped at RMB 13b. However since Nov 17 when the connect program began operation, the daily buy limit has been nowhere close to being filled. In fact the daily limit that can be bought has been steadily increasing as sell flows have picked up. If the run up in Chinese equities was to position for strong buying interest via the stock-connect, then these flows have not materialised.
- Price action and volumes diverge: The continued run in Chinese equities since the second week of December has not been supported by a corresponding pick up in volume. Average daily volume has declined 40% since peaking on December 9th, yet the Shanghai Composite has added another +13% since that date.