Stock analysts most bullish on Chinese companies in a decade

About 86 per cent of the more than 5,600 total stock recommendations in the benchmark CSI 300 Index are now a buy equivalent. PHOTO: REUTERS

SHANGHAI (BLOOMBERG) - Equity analysts just keep getting more bullish on Asian companies, especially in China, where the proportion of buy equivalent ratings in local stocks has now surpassed South Korea to the highest since 2011.

About 86 per cent of the more than 5,600 total stock recommendations in the benchmark CSI 300 Index are now a buy equivalent, according to data compiled by Bloomberg as of Jan 14. That's an increase of five percentage points from a year ago, and has seen China overtake long-time leader South Korea as the major market that analysts are the most upbeat about in the Asia Pacific region, the data show.

Analysts are growing increasingly sanguine as vaccine rollouts boost bets of a rebound in economies, especially export-focused ones like China and South Korea, as well as corporate earnings. Asia Pacific stocks have started 2021 on a roll after a solid finish to 2020 as investors look to a post-pandemic recovery. The relentless rally, however, is spurring concerns about speculative excess, with valuations rich across several sectors.

"Within Asia - and China in particular - there is a strong retail investor and momentum bias to the market," said Louise Dudley, a global equities portfolio manager at the international business of Federated Hermes. "For companies where there have been recent positive revisions, this seems to be sentiment driven, with little change to the fundamentals."

While China is leading the pack, key indexes in South Korea, Hong Kong and India too have seen bullish ratings surge to at least three-quarters of overall recommendations.

'Overly Optimistic'

China's stock market, where historically sell ratings are rare, has seen its proportion of bullish ratings rise steadily from around 67 per cent at the start of 2016, according to Bloomberg-compiled data going back to at least 2006. That's raised questions over whether the market is starting to look stretched. The CSI 300 hit a 13-year high on Jan 12 before pulling back.

"I'm not too concerned that sentiment, judging from this one particular metric, is striking as overly optimistic," said Raymond Cheng, head of Asia equity strategy with JPMorgan Private Bank in Hong Kong. "The big catalyst to watch is upcoming earnings by Chinese companies and whether those numbers live up to sell-side expectations, and continued containment of the outbreak."

Australia, Japan

Meanwhile, two developed economies are trailing on this metric. Buy equivalents make up just over half of ratings in Japan's Topix index and less than 50 per cent of recommendations in Australia's S&P/ASX 200, the data show.

Both countries have struggled to control the spread of Covid-19 from time to time, with Japan most recently expanding its state of emergency. Australia also faces a deteriorating diplomatic row with China.

Japan's outlook is a bit mixed, said JPMorgan's Mr Cheng. Exceptional balance sheets and subdued valuations provide opportunities in areas like banks, but that's offset by a strengthening yen that will constrain exports, he said. Still, he is relatively more positive on Japan than Australia.

The Topix and S&P/ASX 200 have both lagged the MSCI Asia Pacific Index so far this year.

According to Eleanor Creagh, Sydney-based strategist at Saxo Capital Markets, the year ahead should "bring plenty of opportunity for catch up" in Australia. "With a vaccine rollout ahead, earnings rebound in play and the prospect of regional travel bubbles in the pipeline, investors have something to look forward to," Creagh said.

Thomas Poullaouec, head of multi-asset solutions Asia Pacific with T. Rowe Price, said investors should be careful not to draw too many conclusions on the market trend based on individual ratings.

"What is more important is the trend of analyst earning revisions," he said. "Over the last month, analysts have become more bullish on Australia and Japan than on China," he said, citing an analysis by Bank of America. T. Rowe Price is overweight both Australian and Japanese stocks.

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