Norman Chan: Expect Chinese Equities to Continue Tumbling

Norman Chan - Investment Director - NAB Private Wealth AdviosryBy Edward Leung

China finally had its own version of ‘Black Monday’ this week, with the Shanghai Composite Index seeing a steep fall from 3965.685 on 17th August, to 2988.76 at market close on August 26th, an abrupt drop of more than 30% within 7 days. For investors worldwide, the question for the Chinese market is: What would be the “rational” level for a Chinese stock?

Norman Chan, Investment Director at NAB Private Wealth Advisory Ltd, says investors should expect the equities tumble to continue. He told BENCHMARK, “The Chinese stock market has always been tumbling since 2014. Government policies still fall short of economic development and the spare industrial production capacity still presses hard on profit.  The basic profitability level of qChina’s industrial production sector remains lukewarm.”

“For the Shanghai Stock Exchange, the P/E ration remains significantly high. Most Shanghai A-Share SMEs’ P/E ration remains high at 30-40 times, while it is even higher in Shenzhen. On the other hand, the Hang Seng China Enterprises Index remains low by its current standard,” he added.

With the much anticipated US Fed rate rise, Norman Chan calls for investors’ attention to focus on the still mild pace of US economic expansion. He said, “The core PCE (Personal Consumption Expenditure) Price Index is at 1.3-1.4, while US Non-farm Payrolls have increased by a moderate 215,000, which is much lower than expected. Therefore, I don’t see pressure for the US Fed, which is a very data centric establishment, to approve a rate hike as early as September.” BM

Norman Chan’s position:
  • Both the China and Hong Kong markets are still high leveraged, it takes time for the de-leveraging process to take effect
  • Shares are to be dragged by sentiments; Further tumbles should be expected, advising clients to stay put, keep calm, and do some bargaining hunting, but no major portfolio adjustment