A-share market set for long-term bullrun

China's A-share market will exhibit a strong performance over the long term, thanks to sustained interest from overseas investors and higher risk appetite, experts said after the benchmark index breached a three-month mark during intraday trading on Wednesday.

The Shanghai Composite Index rose 0.34 percent to 3593.36 points, after crossing the 3600 point mark for the first time in three months during morning trading.

Prices of papermaking and printing companies, which led the rally, rose by 3.69 percent on Wednesday. They were followed by plastic makers with gains of 2.73 percent and precious metal companies with 2.61 percent.

Huang Yanming, director of Guotai Junan Securities' research institute, said the benchmark index has hovered between 3300 points and 3500 points for nearly three months. But the oscillation will not last long. After remaining flat for nearly six years, the Shanghai Composite Index will hopefully jump to 4000 points later this year.

"The main driver for the bullish stock market performance will be the lower evaluation of risks, which is a result of a firmer outlook on inflation, liquidity and growth. A further spike in risk-free interest rate is quite unlikely. Investors will show more preference for companies with positive business results. An overall surge of blue-chips can be expected, with the mid-cap blue-chips taking the lead," he said.

Guotai Junan analysts suggest investors look for opportunities in securities firms, banks, cyclical companies such as construction materials, new energy vehicles, and firms related to high-end consumption. Small-caps with higher risks may not be good investment targets in the near term, they said.

Xun Yugen, chief strategist of Haitong Securities, said it was likely that the benchmark index may hit a new high this year given the market amplitude over the past few years.

Based on Haitong Securities' calculation, the key A-share indexes have fluctuated by at least 25 percent every year between 2000 and 2020.On extremely bullish or bearish days, the average annual amplitude was as high as 61 percent. The Shanghai Composite Index dived to 3328 points on March 9, which was the bottom so far this year. Given the historic data, there is still room for the A-share market to rise further, said the Haitong analysts.

Net northbound capital flows, or overseas investors buying A shares via the Shanghai, Shenzhen, Hong Kong stock connect programs, exceeded 9 billion yuan ($1.4 billion) on Wednesday. The inflows followed bulk purchases on Tuesday, when overseas investors bought a net 21.7 billion yuan of A shares, the highest since the mechanism was launched in 2014. Most of the overseas investments were in A-share listed food and beverage companies, banks, and non-banking financial companies.

The previous record of net northbound capital flows of 21.4 billion yuan was reached on Nov 26, 2019, when global index provider MSCI increased the weighting of A shares to 20 percent after the market closed for trading that day. Coincidentally, MSCI's quarterly adjustment will take effect when the market closes on Thursday, which is expected to influence investors' position.

Hu Bo, a fund manager from Shenzhen Rongzhi Investment Consultant Co, said that the renminbi appreciation has propelled more overseas capital to flow into Chinese equities. Therefore, quality A-share public companies as well as some companies listed in Hong Kong have been especially favored by investors.

Sufficient capital inflows will play a key role in buoying the sustained bullish performance of the A-share market in the midterm. Cyclical sectors will generate the most opportunities in the months to come, he said.