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Article / 04 July 2016 at 9:48 GMT

Chinese stocks soar on aerospace & defence strength

Saxo Capital Markets China
  • Broad-based rally amid higher volumes
  • Fired by commodity rally and dovish expectations
  • Chinese rate cuts eyed should the Fed become more dovish

Defence shares may outperform in the run-up to Army Day. Photo: iStock

By Jay Luo

Chinese stocks soared on Monday in increased trading volume. Aerospace & defence companies led the advance and all market sectors closed in the green. Coal and nonferrous metals shares also outperformed the market because of the strong rally in commodities and the expectation that major central banks will become more dovish.

The benchmark Shanghai Composite Index rose 1.91% to 2988.60 and the Growth Enterprise Market Index increased 1.7% to 2248.71. Market sentiment improved as a series of market-unfriendly news items in June failed to drag the Shanghai Composite Index to a lower low.

Shanghai Composite index, daily.
Shanghai Composite Index, Daily

It’s reported that many hedge funds managers were waiting for a further price drop by A-class shares because they thought the failure to include China mainland shares’ in the MSCI emerging market index, the Brexit vote and the lifting of a ban on non-tradable shares worth 262 billion yuan, would damage market sentiment.

However, the Shanghai Composite Index succeeded in holding above the 2,800 level and market sentiment seems to be improving. At the same time, investors are expecting China's central bank to cut interest rates and the deposit reserve ratio in the second half of this year should the Fed take a more dovish stance.

In the past three years, Chinese mainland defence shares have outperformed the overall market in the month before Army Day (anniversary of the foundation of the People's Liberation Army), which is on August 1. It’s quite possible that we'll see defence shares outperform the market again this July as no significant improvement in macroeconomic data or corporate earnings are expected in the near future. Market focus is therefore likely to be on such themes as state-owned enterprise reform (especially defence enterprise), Shen Zhen and Hong Kong Stock connections, commodity price and CNY exchange rates.

Aerospace & defence, brokerage and materials shares are on the recommendation lists of many research intuitions.
Commodity price also rose across the board in the Chinese market on Monday. Coking coal futures rose 1.7%, iron ore futures surged by 4% and copper futures increased 2.76%.

Shanghai copper futures, daily.
Copper Futures
Source: EastMoney

– Edited by Clare MacCarthy

Jay Luo is an editor and analyst at Saxo Capital Markets in China


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