Since July 16, the Shanghai Composite -- the benchmark index for China’s A shares -- has won back a lot of its losses, which in the first half amounted to nearly 30% of the index’s value.
Several domestic brokerages weighed in on why there is still time to participate in the latest extended recovery, with many pointing to China’s strategic advantages and stated government support for non-ferrous metals, especially rare earth metals, as reasons to be bullish.
In the Chinese language piece in the Shanghai Securities News, the brokerages also point to encouraging factors such as recent assurances from Beijing that it will not implement any drastic macroeconomic policy shifts for the remainder of the year and expectations of relatively healthy first half earnings reports.
What unites all the bullish brokerages is their urging of investors, both existing and potential, to study up on how cyclical industry shares can offer very favorable returns to those who understand how they operate, but offer the greatest potential pitfalls for those who fail to fathom their inherent risks.
Citic Securities (SHA: 600030) believes that the market has seen its darkest days of the year already and a series of stronger-than-anticipated interim reports should provide a new jolt of support to valuations for the remainder of 2010.
It said the next two months will be critical for companies in determining if the 10% bull run over the past few weeks can be sustained, and both first-half reports and monthly sales performance will be key factors.
"Since hitting last week’s 2,400 level following a profit-taking flurry, the trend has been a steady upward climb, and this week the 2,500 mark looks unassailable and should build further from there going forward for the sustained recovery,” the brokerage said.
It added that any setback in the Shanghai Composite Index will be short lived and investors should be ready to immediately jump back into the market and replace positions held by more skittish shareholders.
HuaChuang Securities said that it sees nothing in the market pointing to a near-term end to a sustained recovery.
It advised investors to keep it simple, and pay the most attention to counters that have lost the most value so far this year as the best investment bets.
"We also recommend a close look at non-ferrous companies following the recent ‘vote of confidence' from Beijing for the sector. Especially worthy of attention are rare earth elements which have huge potential in and of themselves, but even more so with concerted government support,” HuaChuang added.
China has been on a global buying spree for rare earth metals over the past two decades, with the Wall Street Journal estimating that the country has virtual monopoly control over the key products -- controlling 95% of the global supply -- after what the newspaper called "a long, relentless campaign of price wars and export quota reductions.”
Rare earth metals are key to cutting-edge technologies such as mobile handsets, smartphones, lasers, energy-saving light bulbs, wind turbines, hybrid cars and aviation.
The newspaper added that although China has the resources and refinery capacity to produce enough rare earth metals to satisfy a global demand that is rising at 10% per year, its rare earth export allocation for the whole world last year was less than the quantity required by Japan alone.
"When investors finally wake up to the full potential of China’s non-ferrous metals advantages, especially for rare earth products, the market will get another big boost,” HuaChuang added.
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Guolian Securities said that traditional industries were “certainly undervalued” in the first half bear market.
And now that liquidity concerns are greatly diminished and the central government is committed to maintaining market stability for the next several months, China’s capital markets should continue their steady climb.
"We see a good chance for a near-term breaching of the 2,700 level for the Shanghai Composite Index, with cyclical stocks likely taking the lead,” Guolian said.
Industrial Securities was even more optimistic, saying that an expected inflow of new capital, favorable government policy and a healthy reporting season mean that investors ignore at their peril the current opportunities in the stock market.
"The current quarter will almost certainly be the best one in which to begin building a position,” Industrial Securities said.
However, at least one brokerage broke ranks with its peers and is urging considerable caution to investors.
China Merchants Securities said that first half results will be skewed upwards by inventory restocking campaigns following the global downturn.
"We don’t see a lot of upside potential from another economic boost coming anytime soon after that,” it said.
Recent report: CHINA/HK SHARES: Policy optimism lifts index 0.65%, Hong Kong edges higher
