Bullish feeling

Growth factor

"We expect 2013 to be more stable and earnings growth to be the major driver of returns," says Francis Chueng, head of China-Hong Kong strategy at CLSA, a Hong Kong-based brokerage and investment group.

Chueng says that market valuations are still below the long-run averages and hence "cheap". The MSCI China index is trading at 9.4 x PE against 10 percent EPS growth with a 3.1 percent dividend yield. ??? Return on equity is at a healthy 16 percent. "We have a 12 percent upside for MSCI China," he said in a recent research report.

"Faster reform progress is the key upside risk to market valuations," says a Goldman Sachs report. The bank remains overweight on insurance, retail and healthcare, and underweight in telecom and industrials.

"Economic recovery will continue. Macroeconomic policies are stable, and the PMI figures have been positive. The new round of urbanization will expand consumption and investment," Jian Bijia and Chen Tong, analysts with Shenyin & Wanguo Securities said in a recent report.

But for now, many see it as a welcome break from the long spell of gloom and doom when as much as 4.3 trillion yuan evaporated from China's A-share market in 2012. The bear grip also saw individual investors lose as much as 76,800 yuan each, the China Securities Journal said in a recent report.

But with the new leadership reiterating its commitment to stabilize the economy, push forward reforms and restructure the economy, and keep the markets open for foreign investors, there seems to be a sense of belief that the bulls are here to stay for some time.

"The dynamic price-to-earnings ratio for 2012 didn't decline, an obvious signal that the bear market is ending. This year we may see a small bull market developing," he says.

"You've seen a bull market in the last 45 days. Data released by the government shows that the economy is on the right track," says Shaun Rein, managing director of the Shanghai-based China Market Research Group.

The Shanghai Composite Index is likely to post further gains this year, says a recent report published in Securities Times.

Tricky prospect

Predicting the mainland stock market is often considered to be a tricky prospect as it is still young and immature. What's more, trading is still dominated by the hundreds of thousands of small investors who are more influenced by "hearsay" and "heard" instinct rather than by the cool-headed study of market fundamentals.

To understand this phenomenon, it is also important to look back at how the capital markets have evolved in the past years.

The current Chinese stock market started off in 1992 in Shenzhen. Prior to that, the government had allowed some companies to become shareholding enterprises by issuing shares to the employees and the general public, but did not allow trading of these shares.

Since then, the markets have grown considerably and in 2006 had clocked gains of more than 130 percent due to the portfolio investment mania. In May 2007, profit margins had risen to more than 50 percent, while turnover had overtaken the levels seen in markets like UK and Japan. The Shanghai Composite Index hit a record high of 6124 points on Oct 16, 2007.

All of that changed since then and the markets have been seeking lower levels, with the benchmark index falling below the 1800 mark in 2008.

According to market experts, the root cause for the market declines has not been the external environment, but rather the inability of many listed companies, particularly the state-owned monopolies, to create shareholder value through innovative deployment of resources and to maintain sustainable growth in earnings, dividends and share prices.

Such apprehensions become more evident after 1,045 A-share listed companies released their performance forecasts for 2012 in January. Of the total, 960 companies, or an overwhelming 92 percent, said their combined net profits will likely range between 145.74 billion yuan, which is actually a 13.78-percent decline year-on-year, and 174.53 billion yuan, indicating a slight rebound of 3.24 percent, the China Securities Journal reported.

A slump in external demand due to EU recession and the stuttering US economic recovery, and slowing domestic economic growth compounded problems for many Chinese companies last year, especially those in the manufacturing sector.

Chinese steelmaker Guangdong Shaosteel Songshan Co forecast an estimated loss of 1.8 billion yuan for the year - a 58 percent year-on-year slump.