Outlook for China shares still bullish

At a time when sentiment appears to be outweighing fundamentals, particularly in the relatively pricey yet still vastly popular Chinese stock market, ING Asia-PacificÆs newly launched investor sentiment survey supports something that optimists continue to believe but naysayers dread û that Chinese share prices will continue to rise.

According to the ING investor sentiment tracking study, 70% of mass affluent investors surveyed in China expect their stock market to continue to rise over the next three months. Around 85% of them said they generated higher returns on their investments over the past three months, and 83% continue to expect their three-month forward returns to keep rising.

When asked about their opinion about ChinaÆs stock market, investors from other Asian countries were also bullish over the prospects for the rest of this year. If this bullishness translates to actual fund flows, that will be hugely positive for the Hong Kong-listed shares. The Hong Kong stock market is the easiest way for investors outside of China to get exposure to mainland-related shares.

Hong Kong is the regionÆs second best performing market so far this year, next to China, and this is mainly due to speculation over imminent massive capital inflows from the mainland through the qualified domestic institutional investors (QDII) program. Some traders and analysts say the Hang Seng Index can easily breach the psychologically important level of 30,000 points û which will be yet another record at a time when records broken more frequently û in the coming days.

ôThe sources of funds from the QDII program have been pretty remarkable,ö says Chris Ryan, chief executive officer at ING Investment Management Asia-Pacific.

This is the first of a quarterly survey by ING Asia-Pacific to track and anticipate changes in investor sentiment across 13 markets in the region. Research firm Taylor Nelson Sofres (TNS) conducted the survey in July and August among 1,308 mass affluent investors in Australia, China, Hong Kong, India, Indonesia, Japan, South Korea, Malaysia, New Zealand, the Philippines, Singapore, Taiwan and Thailand. ING defines mass affluent as individuals aged 30 years and older, with disposable assets of at least $100,000 except in the Philippines and Indonesia, where the cut-off is lower.

The maiden survey, which was conducted just as the fallout from the US credit crisis in the US was spreading in Asia, is the first to poll investor sentiment across the 13 Asia-Pacific countries.

Ryan acknowledges that concerns over the high valuations of ChinaÆs stock market in general are valid, but he says this doesnÆt necessarily mean theyÆre right. The Shanghai A shares index is trading at a price/earnings ratio of around 45 times 12-months forward projected earnings.

ôYou have to be careful when calling the end of a bull market,ö says Ryan.

He points to similarities with JapanÆs stock market, when people called the end of the bull run too early in the late-1970s and ended up losing out on one more decade of strong gains.

Ryan notes that Chinese investors had limited options in the past, and are just beginning to maximize their potential to invest both in the mainland and in other markets.

ôAround five to six years ago, ChinaÆs investment market practically didnÆt exist. Now, there are tens of millions of investors in China, double the population of Hong Kong and Singapore combined,ö he says.

Aside from the pent up demand for investments, investors in China are also making up for losses in the 2002-2005 period when shares in the mainland suffered a beating due to SARS and a host of other reasons including concerns over an overheating economy.

ItÆs not surprising that Ryan remains bullish on China. ING Investment Management recently launched the ING China Access Fund, a portfolio of 30-40 stocks of China-focused firms listed on international exchanges. Although that product was conceived ahead of the survey, Ryan notes that the survey will provide ING Investment Management with useful insights on the types of products it should launch in the future.