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June 26, 2015 01:00 AM

Shanghai composite index plunges 7.4% as sentiment turns cautious

Douglas Appell
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    Bloomberg
    Shanghai Stock Market

    The Shanghai Stock Exchange Composite index plunged 7.4% Friday to close at 4,192.87.

    The latest plunge brought the market's retreat from its recent closing high of 5,166.35 on June 12 to 19%, just short of the 20% mark some analysts use to define a bear market.

    A few analysts downgraded their forecasts for China's A-shares market earlier this week, but otherwise there was no specific news prompting Friday's sell-off, said Kenneth Wong, a Hong Kong-based China portfolio specialist with Eastspring Investments, in an interview.

    Part of the decline could simply reflect mutual fund managers locking in some gains for the first half of the year, Mr. Wong said.

    The market remains up 30% for the year, still the strongest performance of any major market — even if Shanghai's year-to-date gain was roughly double that of a few weeks ago, Mr. Wong said.

    In a report Friday, Morgan Stanley Research said the Shanghai composite index should trade between 3,250 — roughly where it stood at the start of 2015 — and 4,600 through the middle of next year. Its previously announced range for the period through the end of 2015 was 4,000 to 4,800.

    Noting concerns about weak earnings growth, high margin trading balances, valuations that remain pricey and an expanding supply of equities, the Morgan Stanley report concluded the current sell-off was “probably not a dip to buy.”

    Despite the precipitous fall, Mr. Wong said there were few signs of panic Friday, and with the Shanghai market's price-earnings ratio dropping to roughly 16 times, there's less reason to conclude that valuations are stretched. Even so, investors for now can find even better value in Hong Kong, where the H shares of listed mainland companies boast an attractive P/E ratio of 11, he said.

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