Four uncertainties hold back market performance in June

As of the end of yesterday’s trading hours, the A-share market saw mixed performance. Though some stocks were highly speculated by capitals, loss was still recorded on the whole. After fluctuating with shrank turnover for 15 trading days, investors are more inclined to take a wait-and-see attitude and yesterday saw a new low of turnover in recent period. For the incoming June, factors, including the release of credit risks, the huge wave of unlocked stocks, the intensifying expectation on interest rates hike by the Federal Reserve (Fed) and the substantial progress in deleverage in economy and finance, may all impact market trend. All the “uncertainties” might further worsen market fluctuation. Capitals are cautious in movement due to these uncertainties, making it hard to see any rebound in the short run.

Shanghai bourse records new low in terms of turnover

The SSE Composite Index yesterday recovered and climbed high after opening lower and experiencing a short plunge. In the end, the SSE Composite Index edged up 0.05 percent to 2,822.45 points. During the trading hours, it touched 2,830 points at the highest and dropped to 2,794 points at the lowest. In contrast, the three main indexes on the Shenzhen bourse all closed down. The ChiNext Board Index dropped 0.55 percent to 2,058.52 points, the Shenzhen Component Index closed down 0.46 percent to 9,768.84 points and the SME (small and medium-sized enterprise) Board Index plunged 0.58 percent to 6,383.64 points.

It is noteworthy that the turnover of Shanghai bourse recorded only 115.587 billion yuan yesterday, a further reduction compared with 117.768 billion yuan recorded in last Wednesday. The turnover of Shanghai bourse recorded yesterday is a new low since November 2014 if the turnover recorded under circuit breaker system on Jan. 7 is excluded. After fluctuating with shrank turnover for 15 trading days, investors are more inclined to take a wait-and-see attitude. Though the impetus behind the plunge is limited, the market sees limited power for continuous surge as well.

Analysts point out that the participation of incremental funds is a must to break the deadlock, while the premises for attracting capitals into stock market are that money-making effect in the market is strong or that the valuation of stocks is low enough and appreciation is possible in the middle and long run. It can be seen from current market trend that on the one hand, sectors with sound money-making effect have surged against headwinds for several trading days and their valuation is not low any longer, so capitals do not dare to easily get involved. On the other hand, the money-making effect of white horse stocks is not strong enough in the short run, but they are favored by more and more securities traders. Despite all these uncertainties, off-market capitals are still waiting for their chances.

Uncertainties in A-share market in June

As a matter of fact, risks are relatively concentrated and the market might experience a remarkable fluctuation in June. At present, capitals are waiting for a better timing for stocks purchase. On the whole, securities companies believe there are following uncertainties in the A-share market in June, which will trigger changes in expectation and then result in market fluctuation.

First of all, June will see a small peak of unlocked non-tradable shares. According to data from Wind Information, the market value of non-tradable shares lifted during February and June this year records 158,187 million yuan, 189,198 million yuan, 127,852 million yuan, 211,039 million yuan and 241,553 million yuan respectively. Meanwhile, in terms of the capital amount of reducing shareholding during February-May, it is in positive correlation relationship with the market value of lifted non-tradable shares. Under the sluggish market, the pressure reducing shareholding of the non-tradable shares to be lifted in June cannot be neglected.

Secondly, market credit risks will be mostly released in June. Citic Securities pointed out that credit risks resulted from more efforts in de-capacity and maturity of debenture bonds will continue to be released. The market will face greater pressure in next 2-3 months. Increasing defaults and credit downgrade still exert negative influences on A shares. Industrial Securities also expressed that credit risks would directly affect risk preference and liquidity, enhancing risk-free interest rate.

Thirdly, the U.S. Federal Reserve’s regular meeting about interest rates in June again brings concerns on RMB exchange rate fluctuation. Industrial Securities said that the Fed’s attitude shifting from dovish remarks to hawkish ones gave rise to drastic rebound in possibility of interest rates hike in June, recovery in U.S. dollar index and volatility of RMB exchange rate. As the Fed’s regular meeting in June and July, public voting on Brexit and other risky events are drawing near, expectation on U.S. dollar appreciation may weigh on RMB again.

Fourthly, the European Cup, mid-year liquidity and other events which influence risk preference will take place in June. In addition, although expectation on Shenzhen-Hong Kong Stock Connect program and the A-share market to be included in MSCI Emerging Markets Index will stimulate market confidence to some extent, China Merchants Securities think that in the short run, these two factors cannot solve the problem that the market badly needs incremental capitals.

Therefore, on the whole, in spite of stimulus of various factors, the sideway trading may finish in June and violent fluctuation may lead to market clearing; accordingly, the possibility of rebound will increase gradually. But it is inappropriate for investors to rush into the market in the short term; instead, they still need to wait for a brighter trend.