H-share market: Protect gains as risks of a pullback rise. Following a quiet and directionless February in terms of performance, the H-share stocks broke out from its recent trading range of 6,000-8,000 during the month, surging 14.4% in March to 7,900. In our view, the unexpectedly strong rise was largely attributable to favorable policy responses from the US government and initial signs of stabilization in the US housing and consumption data, and partially attributable to market expectations of sequential improvement of activity data in China. Overall, after examining the various components in our market analytical framework, we feel the market is exposed to the risk of a near-term correction, particularly after the 14.4% rise in March and amid still-weak (albeit less fragile) economic / corporate fundamentals, rising earnings risks, fair valuations, and unsupportive technical factors.
A-share market: Negative tail risks diminish; momentum may fade. Although the annual National People’s Congress (NPC), held March 5-13, did not offer many new policy initiatives to A-share investors, the A-share market (CSI300 index) gained 17% in March spurred on by strong price actions in global equity markets and ongoing investor optimism over policy activity. The major contributors to returns were materials and financials, with the former directly benefiting from a broad-based rebound in global commodity prices and the latter surging on better-than-expected FY2008 results from a large-scale SOE bank and signs of global and China macro stabilization. Going into April, we maintain our view that a tug-of-war between policy activism and lingering global macro headwinds is likely to keep A shares rangebound. However, in light of aggressive policy stimulus (fiscal, monetary and administrative), and the abundant liquidity in the domestic economy we have broadened our expected trading range for CSI300 from 1,800-2,200 up to 2,000-2,600, mainly to accommodate the policy and liquidity factors.
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