Driven by a tremendous growth in the domestic economy, the appreciation of the RMB, listed company’s steady ROE increase, and so on, the Chinese stock market saw solid growth in the past year, 2006. The total market value of the Shanghai and Shenzhen stock market reached more than 87,000 billion yuan by the end of 2006, which was an increase of more than 54£¬000 billion yuan compared to 2005. Three events contributed foremost to the vast growth: First, the issuance of IPOs, especially some large state-owned commercial banks contributed more than two trillion yuan; second, the upgrade of A-shares valuation raised the whole market valuation by nearly 1.8 trillion yuan; third, the tremendous profit growth that listed company’s saw in 2006.
The stock market will continue its steady trend in 2007 supported mainly by the following factors: the Chinese GDP growth is expected to remain at more than 9.5%, international pressures and domestic factors for revaluation of the RMB still exists, and 2007 will see the Implementation of new accounting standards which will improve basic data for majority listed companies furthering increasing investor buoyancy. New government policy is expected to reduce the income tax which will be introduced in 2007, thus the average net profit of companies will increase around 7%. The completion of the Repurchasing of shares of state-owned companies will potentially become advantageous for further improvement in profits for listed companies. Further, a return of large state-owned enterprises and private enterprises listed in the stock market will provide more investment opportunities. Although 2007 will see a tremendous growth in the Chinese market, we should also take a look at several potentially negative factors. The country’s macro-control policies will not relax, most of the current domestic industries including steel, automotive, coal, cement, textiles, paper and so on potentially face overcapacity. A U.S. economic slowdown may also reduce Chinese export growth. A good number of the units have become over valuated after a sharp rise in 2006, thus the overall market PE was nearly 27 times higher compared with overseas markets which are 15-20 times. The large number of new shares issued also set higher threshold to new fund’s intervention.
Even taking into consideration potentially negative factors, with the steady Chinese economic growth, the sharp rise in domestic consumption, strong exports, the Chinese stock market will still have a good performance. Many stocks will see a place for growth in 2007. Reasonably speaking, a majority will see heavy growth. Overall, 2007 will see more investment opportunities, but relatively speaking, more risk will be involved compared to 2006. There are many state-owned blue chips that will IPO in other market in 2007. Due to the support of national policy, these companies generally have monopolized market shares, opportunities which we should pay attention to.
In terms of industries and sectors, we should pay some attention to the following sectors: The real estate sector will grow and follow closely with the appreciation of the RMB; business, tourism, insurance, beverage, household appliances, and automotives will see growth directly related with the increase in consumption; science and technology especially with regards to 3G communications; stocks associated with the 2008 Olympic Games will also see steady growth. In addition, stock index futures will be introduced in 2007, opportunities which will rise out of the futures market could also be considered by professional investors.
Foreign currency rates of exchange may adversely affect the value, price or income of any security or related investment in this report. Investing in Non-US securities, including ADR's is subject to risk.
The opinions and commentary provided by the advisors in the My Automated Advisor Newsletter are the opinion of those advisors and not of My Automated Advisor.
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