Bullish feeling

Growth factor

"We expect 2013 to be more stable and earnings growth to be the major driver of returns," says Francis Cheung, head of China-Hong Kong strategy at CLSA, a Hong Kong-based brokerage and investment group.

Cheung says that market valuations are still below the long-run averages and hence "cheap". The MSCI China index is trading at 9.4 times PE against 10 percent EPS growth with a 3.1 percent dividend yield. Return on equity is at a healthy 16 percent. "We have a 12 percent upside for MSCI China," he said in a recent research report.

"Faster reform progress is the key upside risk to market valuations," says a Goldman Sachs report. The bank remains overweight on insurance, retail and healthcare, and underweight in telecom and industrials.

"Economic recovery will continue. Macroeconomic policies are stable, and the PMI figures have been positive," Jian Bijia and Chen Tong, analysts with Shenyin & Wanguo Securities said in a recent report. "The new round of urbanization will expand consumption and investment."

But for now, many see it as a welcome break from the long spell of gloom when as much as 4.3 trillion yuan evaporated from China's A-share market last year. The bear grip also saw individual investors lose as much as 76,800 yuan each, the China Securities Journal said in a recent report.

But with the new leadership reiterating its commitment to stabilize the economy, push forward reforms and restructure the economy, and keep the markets open for foreign investors, there seems to be a belief that the bulls are here to stay for some time.

"The bear has gone," says Chen Li, the head of China equity strategy at UBS Securities Co Ltd. He expects the A-share market to rise a further 20 percent this year.

"The dynamic price-to-earnings ratio for 2012 didn't decline, an obvious signal that the bear market is ending. This year we may see a small bull market developing," he says.

"You've seen a bull market in the last 45 days. Data released by the government shows that the economy is on the right track," says Shaun Rein, managing director of the Shanghai-based China Market Research Group.

The Shanghai Composite Index is likely to post further gains this year, says a recent report published in Securities Times.

Tricky prospect

Predicting the mainland stock market is often considered to be a tricky prospect as it is still young and immature. What's more, trading is still dominated by the hundreds of thousands of small investors who are more influenced by hearsay and herd instinct rather than by the cool-headed study of market fundamentals.

To understand this phenomenon, it is also important to look back at how the capital markets have evolved in the past years.

The current Chinese stock market started off in 1992 in Shenzhen. Before that, the government had allowed some companies to become shareholding enterprises by issuing shares to the employees and the public, but did not allow trading of these shares.

Since then, the markets have grown considerably and in 2006 had clocked gains of more than 130 percent due to the portfolio investment mania. In May 2007, profit margins had risen to more than 50 percent, while turnover had overtaken the levels seen in markets such as the UK and Japan. The Shanghai Composite Index hit a record high of 6124 points on Oct 16, 2007.

All of that has changed and the markets have been seeking lower levels, with the benchmark index falling below the 1800 mark in 2008.

According to market experts, the root cause for the market declines has not been the external environment, but rather the inability of many listed companies, particularly the state-owned monopolies, to create shareholder value through innovative deployment of resources and to maintain sustainable growth in earnings, dividends and share prices.

Such apprehensions become more evident after 1,045 A-share listed companies issued their performance forecasts for 2012 last month. Of the total, 960 companies, or an overwhelming 92 percent, said their combined net profits will probably range between 145.74 billion yuan, which is a 13.78-percent decline year-on-year, and 174.53 billion yuan, indicating a slight rebound of 3.24 percent, the China Securities Journal reported.

A slump in external demand due to the EU recession and the stuttering US economic recovery, and slowing domestic economic growth compounded problems for many Chinese companies last year, especially those in the manufacturing sector.

The Chinese steelmaker Guangdong Shaosteel Songshan Co forecast a loss of 1.8 billion yuan for the year - a 58 percent year-on-year slump.

The Ministry of Industry and Information Technology also came out with guidelines last year for merging and restructuring big enterprises, in an effort to cut down on wasteful competition and improve earnings quality. About 900 listed companies, with a total market capitalization of 4 trillion yuan, were expected to have been included in the scheme.

China also aims to have just three to five large automakers with core competitiveness, and increase the concentration ratio of the top 10 automakers to 90 percent by 2015, according to the guidelines.

At the same time, the country will work to cut many steel producing enterprises and phase out outdated capacity through mergers, to raise the concentration ratio of the top 10 steel producers to around 60 percent by 2015.

China will also slash the number of firms in the rare earths business through mergers and concentrate production capacity in the sector in a number of large enterprises, the guideline says.