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Valuation defy Egypt worries in Shanghai

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advance9 January 31, 2011 (Chinavestor) China stocks rallied on valuation in Shanghai despite unrest in Egypt. The Shanghai Composite Index (SHA:000001) advanced 37.1 points or 1.3 percent as investors snapped up industrials before the earnings season. But investors in Hong Kong were keeping an eye on the U.S., sending the Hang Seng Index (INDEXHANGSENG:.HSI) 169.7 points or 0.7 percent lower for the day.Airliners, telecoms, insurance and financial stocks all fell while oil companies managed to stay in the black. Petrochina Co. Ltd. (HKG:0857), the largest oil producer in China, advanced the most among components of the Hang Seng Index (INDEXHANGSENG:.HSI). Despite a steep fall on Friday, outlook is not improved for iShares FTSE/Xinhua China 25 Index (NYSE:FXI) and for the Guggenheim China Small Cap ETF (NYSE:HAO) either. The decline was universal in Hong Kong, stocks that fell outnumbered those that advanced six to one. China Southern Airlines (HKG:1055), Air China (HKG:0753) and China Eastern Airlines (HKG:0670) all fell. Yanzhou Coal Mining (HKG:1171) extended a decline form last week, while insurance companies fell on short term outlook for the market. Investors found safety in oil stocks though as price of oil rose in the wake of Egypt's unrest. Besides Petrochina Co. Ltd. (HKG:0857) (NYSE:PTR), China Petroleum & Chemical Corporation (HKG:0386) (NYSE:SNP) or Sinopec, the largest oil refiner in Asia by volume, rose the most among components of the 42 member Hang Seng Index (INDEXHANGSENG:.HSI).

Trading was different in Shanghai where investors focused on upcoming corporate earnings and valuation. Chinese domestic shares are trading at 11.7 times earnings, a significant discount compared to their Hong Kong listing. Investors snapped up industrials and resource plays as China's GDP growth of over 10% commences hefty profit growth for the sector. But financial and real estate sectors were lacking momentum as policy makers might tighten the screw on those two key areas to fight inflation and  preventing a housing bubble.

pre_2011131

Last Friday was a difficult day for Chinese stock investors for the DJIA's weakness prompted a sharp decline in China ADR prices. Large cap proxy iShares FTSE/Xinhua China 25 Index (NYSE:FXI) fell 2.6% last Friday while the Guggenheim China Small Cap ETF (NYSE:HAO)tumbled 2.5%. Outlook is slightly improved over last week but none of these ETFs are out of the woods yet - according to their components trading in Asia this morning. Most components of the iShares FTSE/Xinhua China 25 Index (NYSE:FXI) ended the day in the red in Asia, suggesting large cap Chinese ADRs are going to suffer on the NYSE as well. Chinese airliers and China Telecom (HKG:0728) (NYSE:CHA), the best performing Chinese telecom in January, fell the hardest on Monday.

Outlook for small cap Chinese stock is not much better either. Only sixty out of the hundred sixty and two components of the Guggenheim China Small Cap ETF (NYSE:HAO) advanced in Asia this morning, suggesting small cap Chinese stocks are up to a difficult day on Monday.

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If components of the Hang Seng Index (INDEXHANGSENG:.HSI) can serve as proxy for ADR trading,m outlook is best for large oil companies, like Petrochina co. Ltd. (NYSE:PTR) and China Petroleum & Chemical Corp. (NYSE:SNP), but airliners, telecoms and insurance companies are in trouble ahead the opening bell. Industials, such as Mindray Medical (NYSE:MR), might benefit from the rally in Shanghai as components of the Shanghai Composite Index (SHA:000001) testify.

Sohu.com Inc. (NASDAQ:SOHU) and its former online game unit, Changyou.com (NASDAQ:CYOU) are reporting Q4 before the open, something that will have ramification for the rest of the Internet sector.



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