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LIVE MARKETS-China: mind the valuation gap

LIVE MARKETS-China: mind the valuation gap

reuters.com · 09/01/2021 05:29
LIVE MARKETS-China: mind the valuation gap

Europe's Stoxx up 0.8%

Banks and insurers up 1.3%

Travel and leisure up 1.4% after recent selloff

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Beijing's new-found focus on social welfare "marks an economic inflection point that investors do not yet fully comprehend," analysts at the TS Lombard consultancy write. Indeed, recent regulatory crackdowns on a range of sectors show investors must learn to value Chinese equities more accurately.

Back in January, MSCI's China index traded around 19.6 times forward earnings, while their global peers were valued at 27 times. The discount has now widened to 25 against 14 but is there further to go?

Very likely, says TS Lombard.

A valuation comparison shows forward price/earnings (PE) ratios in China's consumer staples and IT have fallen to pre-pandemic mean levels but many others have not.

In fact, tech, consumer goods, healthcare, and telecoms still trade at a premium to global peers, the report points out.

For a long time, valuations in these high-growth sectors rivalled Western peers, notes Gael Combes, head of fundamental equities research at Unigestion.

In contrast, at state-run companies and big banks regulatory risks were well understood and factored into share prices.

Ongoing regulatory crackdowns had "made it hard to assess whether stocks are correctly priced or not", Combes adds.

The worst case scenario for markets would be a severe wealth redistribution thrust that takes P/E ratios on "growth" companies towards the 10-12 times average seen in the utilities sector. TS Lombard estimates this would send MSCI China into a 40% tailspin.

That's unlikely however, according to the report which sees a 10-15% decline as "a realistic worst-case."

It considers consumer discretionary and health care as particularly vulnerable to authorities' prosperity strategies, which could include forcing cash-rich and profitable companies to contribute more.

"The still relatively high valuations in the Consumer Discretionary sector suggest that further measures are likely," TS Lombard adds.

(Sujata Rao)



European equities are higher shrugging off worries of a possible correction after seven months of gains in a row.

Rising U.S. and European bond yields are propping up rates sensitive stocks like banks .SX7P and insurers .SXIP both up 1.3%.

Retailers stocks .SXRP are among the best performers, up 1.5%, despite disappointing results from WH Smith; while travel and leisure shares, up 1.4%, are recovering after a recent selloff on worries about further travel restrictions.

In the last few days, there was a lot of noise amid hawkish remarks by ECB officials, economic data and the spread of the Delta variant, Jeffery Halley, senior analyst at Oanda, says.

But “the unlimited zero per cent central bank money continues to pump up asset prices. In other words, business as usual,” he adds.

After forecasting profit for the year at the lower end of market expectations, shares in British retailer WH Smith SMWH.L are down 7% among the worst performers on the Stoxx 600. Biomerieux stocks BIOX.PA are up 5.8% after results.

(Stefano Rebaudo)



After seven straight months of gains for stocks, some investors are beginning to wonder when the good times will end.

Data from Asia on Wednesday is the latest reminder that they may not last.

Factory activity lost momentum in August as a coronavirus resurgence hit supply chains across the region. China's factory activity slipped into contraction for the first time in nearly 1-1/2 years, while chip shortages and factory shutdowns slowed manufacturing in Japan, South Korea and Taiwan.

So far, markets don't seem overly concerned.

Propelled by bets of continued central bank support, the S&P 500 .SPX, Europe's STOXX 600 and MSCI's global equity index .MIWD00000PUS closed August with their seventh straight month of gains.

With the Federal Reserve last week appearing in no rush to pull back stimulus, traders are honing in on Friday's U.S. jobs figures for their next clues on taper timing.

So where will it all end?

An ominous sign is that the last time world stocks notched up their best run of monthly gains -- a 15-month streak that ended in January 2018 -- markets then tumbled to their worst year since the global financial crisis.

Back then it was precipated, at least in part, by worries of tightening monetary policy.

Sound familiar?

Developments that should provide more direction to markets on Wednesday:

- Biden says Afghanistan exit marks the end of U.S nation-building. nL1N2Q2055.

- BOJ's deputy governor warns against premature monetary tightening. nL4N2Q30JV.

- S.Korea's parliament passes bill to curb Google, Apple commission dominance. nL1N2Q20PT

- Central bank of Chile raised rates by 75 bps

- Australia Q2 GDP stronger than expected at +0.7% q/q.

- ECB Board member Edouard Fernandez-Bollo speaks at 1155 GMT.

- Federal Reserve Bank of Atlanta President Raphael Bostic speaks at 1600 GMT.

(Tom Arnold)



European stock futures are in positive territory after yesterday's fall, although most analysts see room for taking some profit off the table.

Positive vibes come from China's stocks, which closed higher as weak economic data raised hopes of more stimulus from the government, which might introduce counter-cyclical measures.

Markets are also focusing on next week's ECB policy meeting. But while some hawkish comments sent jitters through trading floors yesterday, analysts see these remarks as unlikely to represent the view of the majority of the ECB's Governing Council.

(Stefano Rebaudo)