BT: Can China stocks continue to forge their own path? (15 Jul 2006)

Business Times - 15 Jul 2006

Can China stocks continue to forge their own path?
By R SIVANITHY
SENIOR CORRESPONDENT

UNTIL this week, it looked very much like China stocks offered local market participants a fresh defensive option other than those which are typically described as 'defensives', namely, blue chips with strong balance sheets, cash flows and pay large dividends.

Indeed, the ability of the China segment to run on its own steam led some observers to comment that Singapore now has a two-tier market - China versus the rest, with China emerging as the 'haves' and the rest as the 'have-nots'.

To be sure, it may well be that once this period of weakness is over and volatility settles down, China stocks could once again forge their own path, independent of the broad Singapore market. And given that the local economy is expected to slow in line with the US while China is still expected to grow, a divergence can be reasonably expected.

But as events of this week have shown, the direction for China stocks is not necessarily upwards all the time.

In a week when the Straits Times Index lost 82 points or 3.4 per cent, China counters initially held firm but eventually capitulated - partly because of the weak sentiment here but also because their home market on Thursday plunged on various liquidity-related concerns.

In yesterday's session when the ST Index dropped 33.09 points to 2,363.55, market favourites such as China Milk, China Sun, Celestial Nutrifood, China Hongxing, China Fishery, China Sky, Bio-Treat and Pine Agritech all came under considerable selling pressure throughout the day - even though the main China benchmarks actually posted slight rebounds after dropping 5 per cent on Thursday.

The selling among index components was nearly indiscriminate - 41 fell while only Jardine Matheson rose. The banks, Singapore Exchange, and other Jardine stable members Hongkong Land and Jardine Strategic contributed the most to the fall.

The source of the pressure throughout all equity markets was a record-high oil price which sent Wall Street tumbling on Thursday and led to a 1.6 per cent loss for Japan and a 1.04 per cent loss in Hong Kong. All European markets also opened weaker yesterday.

The other main play throughout the week was technology, though like China, the direction was downward. For example, despite a 'strong buy' from Nomura Research, semiconductor stock Utac came under considerable pressure for most of the week following a Citigroup 'sell', though a relatively muted 1.5-cent loss to 70 cents yesterday suggests a bottom could be close.

Elsewhere, MFS Technology dropped 8.5 cents to 91.5 cents on volume of 12 million after its possible acquirer, Nasdaq's M-Flex, issued a profit warning, while heart stent maker Biosensors slid 6.5 cents to 82 cents for no obvious reason.

According to the New York Times, the number of days so far this year in which the Dow Jones Industrial Average has either risen or fallen one per cent is 21, compared with 30 for the whole of 2005. Volatility is obviously high and looks set to remain so, especially with escalating tensions in the Middle East sending oil to new highs.

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