Dud earnings drive China’s bear market

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The on-going weakness in Chinese equities has been a recurring theme for me. Here is the latest bear market low:

There is nothing particularly out of the ordinary regarding the poor performances of equities if one compared Chinese equities with other stock market bubbles. More to the point, corporate profits have been quite weak. Profit warnings filed with the Hong Kong stock exchange, for instance, reached record high for the first half earnings season.

The chart below from Goldman Sachs illustrates the point perfectly. It shows that for A-share companies (CSI 300) which have reported their second quarter earnings, growth on a year-on-year basis for second quarter of 2012 is now hugely negative if we exclude the financials. Meanwhile, profits for MSCI China in the first half increased by a mere 1% yoy, or –5% yoy when financials are excluded:

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Source: Goldman Sachs (click to enlarge)

This is consistent with my view that over-investment eventually leads to low returns on investment and poor corporate profitability. With poor earnings growth, it is becoming even less surprising that Chinese equities are among the worst performers.