China's benchmark stock indexes are set to scale new peaks this year on the back of the country's strong economic recovery, renminbi appreciation and steady foreign capital flows, experts said.
Although the Shanghai Composite Index and Shenzhen Component Index dropped slightly on Friday after four consecutive days of rises, the technology-focused ChiNext at the Shenzhen bourse rose 0.19 percent to 3232.29 points. The total trading value at the two exchanges exceeded 1 trillion yuan ($156.8 billion).
More importantly, net northbound capital flows, or overseas investors buying A shares via the Shanghai, Shenzhen and Hong Kong stock connect programs, reached 46 billion yuan as of Friday, a new weekly record since the connect mechanism was launched six years ago. It was also the seventh consecutive week that northbound capital reported net capital inflows. Financial companies, daily consumer goods providers and healthcare companies saw the maximum foreign investment during the last five days.
Overseas' investors bulk purchase of A shares came after global index provider MSCI's latest adjustment which took effect on Thursday. Five Chinese firms such as China Railway Signal & Communication Corp Ltd were included in the MSCI China A Index Series, making it the first time that STAR Market-listed companies were included in the MSCI flagship index.
Increasing overseas capital inflows into the A-share market are usually concurrent with MSCI adjustment based on past experiences. The previous intraday net northbound capital flow record of 21.4 billion yuan was reached on Nov 26, 2019, when MSCI increased the weighting of A shares to 20 percent.
Analysts from Haitong Securities said that the loose liquidity environment in China, appreciation of renminbi and lower inflation expectations have provided ample room for surges in the A-share indexes. Securities firms, defense industry, semiconductor producers and lithium cell makers are among the sectors that are likely to attract investor attention.
Huang Yanming, director of Guotai Junan Securities' research institute, said in a report that the Shanghai Composite Index may touch 4000 points later this year. He reiterated his prediction on his social network account on Thursday, saying that securities firms will lead the surge. Mid-cap blue-chips will also become a major driver of the rally, followed by large-cap blue-chips. The small-cap companies which showed unusual price fluctuations are unlikely to surprise investors in a good way, he said.
Laura Wang, chief China equity strategist at Morgan Stanley, said that economies worldwide, including China, are grappling with reflation challenges. Against that backdrop, A-share investors can look for opportunities in raw material providers and banks. Consumption and services industries in China will see their share prices returning to the pre-COVID levels. Investors should consider increasing their allocations for these sectors, said Wang.
Wang also cited sectors such as consumer durables, especially sports brands, as good investment options. ESG, or environment, social and (corporate) governance, is another aspect that has become a major investment theme globally. So investors should pay more attention to A-share companies with related businesses as China has been making more efforts to realize carbon neutrality, she said.