An investor appears unimpressed by the yawning gap between his expectations and actual stock prices at a brokerage in Nanjing, Jiangsu province, on Dec 19, when the Shanghai Composite Index closed almost flat. [Photo/China Daily]

Prudent money policy, expected 'aggressive' fiscal stance hold key

Analysts have a bullish outlook for the A-share market in 2017, with more confidence in macroeconomic fundamentals and companies' profitability.

Fast-growing emerging industries have become strong drivers of China's overall economic growth, particularly after regulators, policy-makers and market players expressed clear views on reform and transformation.

Also, the central government mapped out growth guidelines for 2017 last week.

"Monetary policy is officially set to be prudent and neutral in 2017, but fiscal policy will not only remain aggressive, but also become more forceful and effective," said Xing Dong Chen, chief economist with BNP Paribas.

"While limited in breakthroughs regarding the SOE reform, central economic policy is committed to improving private property protection and increasing the government's creditworthiness in order to regain private investor confidence and business enthusiasm."

Profitability of companies has been recovering based on their performance in the last quarter of 2016. While emerging industries' growth has been accelerating, reforms of State-owned-enterprises and "supply-side reform" measures have had evident impact on traditional industries such as coal mining and steel making, which have achieved capacity reduction and recovery in net profits, according to Xun Yugen, analyst with Haitong Securities.

"It is estimated that the consumption, healthcare, information technology, and telecommunications industries can maintain net profit growth at 25 percent year-on-year, and traditional industries, including energy and raw materials, can grow their profits at somewhere between 20 percent and 25 percent," Xun said.

"The overall A-share market's net profit growth is estimated at 8 percent year-on-year at the end of 2017, putting an end to a four-year-long correction."

Listed companies will also see better liquidity because their debt service cycle is approaching the end, and another round of financing and capital expansion may start soon in 2017, according to Dai Kang, analyst with Huatai Securities.

"Companies' incentives for inventory replenishment and investment are rising as fundamentals are recovering to a much better level than that at the beginning of 2016. These fundamentals are likely to support companies' profitability growth in the next 12 months," Dai said.

Companies focusing on consumption-driven businesses (foods and beverages, healthcare and medical services), pan-entertainment sectors (sports, media, and filmmaking) and the hospitality sector (restaurants, hotels and commercial real estate developers) are likely to see robust growth in revenues and profits, said a research note from Guosen Securities.

In 2017, institutional investors will play a bigger role in the A-share market since pension funds are expected to be allowed to enter the market.

"Institutional investors usually attach more importance to fundamentals and long-term value. They play the role of an 'anchor,' bringing more stability to the market and requiring more transparency and better regulations, such as disclosure and compliance efforts," said Cao Jianfei, chairman of Yuanshi Asset.

"This will benefit the A-share market in the long run and will, in the short term, boost blue-chip stocks which are undervalued."