Strong foreign capital flows, healthy corporate outlook to sustain uptrend

Strong foreign capital flows and the healthy investment outlook for companies will put the A-share market on a strong growth trajectory this year, analysts said on Friday after most of the major indexes notched up gains.

The benchmark Shanghai Composite Index rose by 0.57 percent to 3696.17 points, while the Shenzhen Component Index gained 0.35 percent to 15823.11 points. The technology-focused ChiNext in Shenzhen fell for the second consecutive day by 1.04 percent to 3285.53 points. The combined trading value of the Shanghai and Shenzhen bourses exceeded 1 trillion yuan ($154 billion) by Friday.

Northbound investments, or capital flowing from overseas investors using the stock connect program between Shanghai, Shenzhen and Hong Kong, saw net inflows of 9.55 billion yuan on Friday, up by 88 percent over Thursday. This is the highest level so far this year since Jan 8.

Undervalued cyclical sectors such as banks, nonferrous metals, non-banking financial industries and property were the favorites of foreign investors. On the other hand, overseas investors decreased their positions in overvalued sectors such as electronics, food and beverages.

Analysts from Guosheng Securities said the major indexes have been moving up and down due to the shifting investment preferences. Investors can look for opportunities in industries highlighted in the 14th Five-Year Plan (2021-25), including artificial intelligence, integrated circuits, quantum information and space technology.

Though there will be a contraction in market credit, mutual funds will continue to issue more products this year, according to analysts from TF Securities. Leading public companies will continue to attract most of the capital and hence there would not be any significant change in the preference of large-cap companies to small-cap ones.

But it is possible that the price volatility of the leading A-share companies will become more noticeable. Investors should lower their expectations for returns this year. Starting from the second quarter, the global market may see a turning point in liquidity, which will result in price fluctuations of certain overvalued companies, TF Securities said in its report.

Switzerland-based investment bank UBS said bourses in emerging markets will offer satisfying returns this year and the same will be driven by improved profitability rather than rising valuations. China is the prime choice for investment this year, thanks to its earlier recovery from COVID-19 and higher returns than many of the developed markets, it said.

Luo Shifeng, research director of Nuode Asset Management, said the A-share market has performed quite strongly since the beginning of the year due to the renewed optimism about global economic recovery and lower expectations for market uncertainties. A-share market companies specializing in food, restaurants, healthcare and new energy will be among the top gainers this year, he said.