Bears on Chinese equities are in retreat even as bets against the country’s companies exceed those of any of the world’s biggest markets, a buy signal for some of the nation’s most accurate stock forecasters.
Short sales of Hang Seng China Enterprises Index shares dropped to an average 16 per cent of equity available for lending from 21 per cent at the end of August, the largest decline among indexes in the 10 largest markets, according to data compiled by Data Explorers and Bloomberg. The level compares with a 10 per cent average for the Standard & Poor’s 500 Index and 7 per cent for the UK’s FTSE 100 Index, the data show.
The index of Hong Kong-listed shares surged 15 per cent in the past two months as third-quarter profits beat analysts’ estimates by twice the margin in emerging markets and confidence grew that China’s government will prevent the quickest-expanding major economy from overheating. Morgan Stanley and China International Capital Corp. strategists who predicted the rally say it will continue through yearend and may lead more investors to buy back stocks. When short sales fell this much in May 2009, the Hang Seng rose 24 per cent in six months.
“Many investors are quickly changing course and being forced to cover their shorts,” said Sandy Mehta, the chief investment officer at Hong Kong-based Value Investment Principals who forecast a rally in Chinese shares at the end of July. “This will gather momentum.” Short sellers borrow and sell stock to bet that prices will drop so they can repurchase the securities, repay the loan and pocket the difference.
‘Short squeeze’
The Hang Seng index climbed 0.9 per cent today to the highest level since June 2008 and the Shanghai Composite Index of mainland-traded equities jumped 1.9 per cent after the US Federal Reserve announced it will expand record measures to boost the world’s largest economy. Goldman Sachs Group Inc. said yesterday that the Hong Kong market has the most to gain from China’s growth and the Fed’s monetary stimulus.
The high level of bearish wagers in China “could produce a short squeeze when the market continues to rally and thus could be a contrarian indicator,” Hao Hong, the Beijing-based global equity strategist at CICC, the top-ranked brokerage for China research in Asiamoney’s annual survey, wrote in an e-mailed note on October 28.
Hang Seng companies reported third-quarter net income that topped analysts’ projections by an average 6.4 per cent so far, compared with 2.5 per cent for the MSCI Emerging Markets Index, according to data compiled by Bloomberg.
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Earnings growth
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The Chinese stock gauge trades at 12.4 times analysts’ 12- month earnings estimates, a 7 per cent discount to the average level since March 2006, according to data compiled by Bloomberg. The measure is valued at a 29 per cent discount to the Bombay Stock Exchange Sensitive Index of shares in India, the world’s second-fastest expanding major economy.
Aluminum Corp of China Ltd. shares rallied 19 per cent in the past two months. Short sales in the unit of China’s biggest maker of the lightweight metal fell to 68 per cent of lendable shares from 81 per cent at the end of August.