Investors fret over market prospects

08:31, December 30, 2010      

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If there's a single word that best sums up his anticipation for next year's stock market, Edward Xiao said he would choose "bumpy."

The 30-year-old office worker in Shanghai, who has been investing in stocks for nearly five years, is looking at 2011 with some trepidation.

Although he managed to stay in the black with his investments in coal miners during a gyrating market in 2010, Xiao said he thinks that feat will be hard to repeat next year.

"There are no incentives so far to drive the market higher," he explained. "Just when everyone was feeling relieved that the worst of the global economic crisis had passed, worries about inflation, slower growth and rising interest rates in China are spoiling the party."

Xiao is not alone in fretting about prospects for the Chinese stock market next year as the key index ends the year with a whimper.

The Shanghai Composite Index has lost 16 percent this year, one of the world's worst performing markets. After rising as high as 3,306 points in January and falling to a low of 2,300 in mid-year, it has been fluctuating between 2,500 and 2,900 - bouncing up against but not breaking through the critical 3,000 level again.

Sleeping Beauty

What does all that mean? A choppy road ahead, say many analysts.

"The market will be a bit like Sleeping Beauty next year," said Deng Eryong, an analyst with Changjiang Securities Co. "It will have a hard time making any gains in the first quarter as inflation weighs in and corporate profits probably drop.

"The market will remain in a slump in the second quarter because inflation is likely to jump to a high level. But things are likely to turn around beginning in the third quarter, when profits for industrial companies start to pick up."

China's consumer prices in November surged 5.1 percent, the biggest gain in 28 months. A central bank poll of 20,000 people this month showed that most Chinese expected inflation to continue to accelerate.

Deng's outlook for 2011 is shared by forecasts from 24 brokerages. The consensus is for a market hobbled by inflationary concerns for the first half of next year, then, as prices subside, the market will wake up again.

Credit Suisse Group AG predicted in a report on December 25 that the rate of inflation could reach as high as 5 percent next year before it begins to abate. The Swiss-based financial services company is predicting a 20 percent rise for the mainland market by the end of next year.

Inflation, a top focus of the Chinese government's work plan for next year, may erode companies' earnings because of rising labor and raw material costs. That, in turn, would adversely affect stock prices and rates of return.

Equities could also be affected by the government's fire power aimed at inflation, including more interest-rate hikes and further clampdown on lending.

Both would make it much harder for companies to borrow money for expansion.

Added to that, an expected appreciation in the yuan next year could impair earnings of firms in the export sector, although airlines, real estate and banking sectors might profit as assets increase in value and more people can afford overseas flights.

Reap the benefits

Analysts said that if investors are patient and willing to weather the impact of inflation and a tighter monetary policy, they'll reap the benefits in the latter part of next year.

Still, picking the right stocks to position oneself is important. Among all the 24 forecasts released by brokerages, most showed preferences for companies that are either consumption-related or in sectors that are targeted for growth under China's new Five-Year Plan for the period between 2011 and 2015.

Equipment manufacturers such as Hubei Aviation Precision Machinery Technology Co and miners such as Henan Shenhuo Coal and Power Co and Yanzhou Coal Mining Co will be among the winners next year, according to Changjiang Securities.

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