IF you are worried about China’s worst earnings season since the global financial crisis, you’re looking at this stock market rally all wrong.

    At least that is the message from individual investors. They have propelled the Shanghai Composite Index to a 90 percent surge since mid-October, even as 2014 profits missed estimates by the most in six years and analysts cut their outlooks at the fastest pace since 2009.

    Foreign skeptics see the disconnect between earnings forecasts and share prices — now bigger than in any of the world’s top 40 markets — as a sign that China’s rally has gone too far.

    Yet it’s Chinese mainland individuals who account for at least 80 percent of trades, and they are still buying shares at a record pace in anticipation of further government stimulus. That helps explain why the highest price-to-earnings ratios in five years have failed to slow the Shanghai Composite’s advance.

    “Right now, people are betting on policies instead of fundamentals,” said Alex Wong, a Hong Kong-based asset management director at Ample Capital Ltd., which oversees about US$150 million.

    For international money managers more accustomed to analyzing income statements than the habits of China’s part-time traders, the rally has been painful. They have pulled about US$2.6 billion from the three biggest overseas exchange-traded funds (ETFs) tracking China’s domestic stock market in the past month, a period when the Shanghai gauge rose 21 percent.

    On Hong Kong’s stock trading link with Shanghai, there’s still about 171 billion yuan (US$27.6 billion) in quota for mainland equity purchases that has gone unused by foreign funds.

    “If investors followed the value investing principle, they would have missed out,” said Hao Hong, a China strategist at Bocom International Holdings Co. in Hong Kong.

    Earnings in the Shanghai Composite trailed analyst estimates by 2.7 percent last year as 63 percent of companies missed projections. Results for the first quarter so far have lagged behind by 17 percent. While analysts predict profits will climb 28 percent in the next 12 months, they have cut per-share estimates by 9 percent since mid-October.

    The trend is similar across the border in Hong Kong, where about 59 percent of Hang Seng Index companies trailed 2014 earnings estimates and analysts’ 12-month forward projections dropped by 7 percent from their high in October.

    PetroChina Co., the nation’s biggest company by market value, became one of the latest examples of the divergence between share prices and profits this week.

    The US$402 billion oil producer climbed to the highest intraday level since 2009 in Shanghai trading Tuesday, even after posting a worse-than-estimated 82 percent drop in first-quarter profit to the lowest level on record. The stock has surged 33 percent this year amid speculation China will merge government-owned companies in the energy industry.

    Investor confidence will start to sour if earnings don’t improve, said Grace Tam, a global market strategist at JP Morgan Asset Management, which oversees about US$1.7 trillion worldwide. The Shanghai Composite is valued at 17 times estimated earnings for the next 12 months, the highest level since April 2010 on a weekly basis, and the median multiple index companies is about twice that level.

    “Sentiment is too bullish,” Tam said in a briefing in Hong Kong on Monday. “If there could be a healthy correction, we would be more comfortable to buy.” (SD-Agencies)