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Rise in stock index forecast follows positive earnings reports

(China Daily)
Updated: 2009-11-16 07:56

Chinese individual investors watch the exchange market at a brokerage in Shanghai. China's benchmark Shanghai Composite Index is forecast to continue posting positive numbers. [Asianewsphoto]

Unexpectedly strong earnings at listed Chinese companies have spurred analysts to raise their profit forecasts, creating room for about a 15 percent rise in Shanghai's benchmark stock index over the next three months.

The upbeat earnings, fed by China's steady economic recovery, are restoring optimism in the stock market after last quarter's gloom, but the rally could be derailed if the government moves more quickly than expected to tighten monetary policy.

"It's very clear that corporate earnings, propelled by the economy's recovery, are now improving much more quickly than the market had expected," said Wu Xiong, a research manager at Orient Securities in Shanghai.

"Investors could now adjust their investment strategy and take a much more optimistic approach," Wu said.

Mainland-listed firms' combined net profits rose 26 percent in the third quarter from a year earlier, leading analysts to boost their forecasts for 2009 Chinese corporate earnings growth to 20 percent from a flat performance forecast just two months ago.

That cut the average forecast price to earnings (PE) ratio of stocks. The 12-month forward PE ratio on Shanghai A shares stands at 18.3 as of November, down from 22.6 in August and well below the all-time high of 35.1 hit in 2007 during the market's bubble peak, data from Thomson Reuters showed.

Related readings:  Chinese firms rush to jump on IPO bandwagon  Wild swings leave investors edgy  China Merchants Securities to launch IPO this week  Stock index down after fluctuations

The lower PEs, considered reasonable given China's growth potential, give China's benchmark Shanghai Composite Index room to rally in the coming three months or so by around 15 percent from its current level.

That would see the index breach its 2009 high of 3,478 points in early 2010, according to eight fund managers, analysts and economists surveyed by Reuters this month.

In a previous survey in early September, Orient Securities' Wu and the others proposed a defensive investment strategy, partly because of high stock valuations.

The market has staged several good-sized technical corrections since August, however, that have trimmed valuations.

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