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A shares: a resting bull or a bursting bubble?

(chinadaily.com.cn)
Updated: 2007-02-09 17:29

In the near term, however, risks remain on the downside, as the market is still massively overbought. Technical considerations aside, our major concern is that interest rates will be on the rise in the coming months.

Policymakers are still in a tightening mood, and further increases in interest rates are possible, given that interest rates are substantially lower than nominal economic growth.

The central bank's heightened concern over interbank liquidity suggests that it will step up liquidity withdrawal from the banking system, which will likely push up money market rates.

There has been a sharp uptick in theconsumer price indexin recent months due to higher food prices. Although we don't think inflation is a risk to the economy, an inflation scare might push up bond yields, which are already on the rise.

Bottom Line: As a tactical move, BCA Research suggests its clients continue to keep a watchful eye on the A-share market, but stay on the sidelines for now. The equity market might enter a phase of maximum risk in the coming months due to a potential increase in interest rates. This, combined with stretched valuations, makes the risk-return profile of holding A shares unattractive over the short term. However, a sizable correction will generate an excellent buying opportunity to enter the market.