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Investors snap up China stocks ‘priced for financial crisis’

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21/08/2014
Global investors have been snapping up cheap Chinese stocks as signs of a banking collapse recede, but economic data remains mixed.

The MSCI China index returned 17.5 per cent in the three months to 12 August, compared to 6.4 per cent from the MSCI Emerging Markets index.
 
A combination of cheap stocks and some data indicating stable growth has encouraged investors to position themselves in China. In addition, Russia’s status as a no-go area for most Western investors is limiting other options.
 
Henderson Global Equity Income fund co-manager Ben Lofthouse has been steadily increasing his allocation to China to take advantage of low valuations.
 
“We have had the sense over the last few months that the government wants to stimulate the economy a little bit more.

“The economy is doing 6 per cent to 7 per cent growth, wages are going up, and there is still a middle class emerging.”
 
Companies Lofthouse has bought include technology firm NetEase and Petro China.
 
China’s industrial production was 9 per cent higher in July than the previous year, according to recent figures, while retail sales rose by 12.2 per cent. The latest manufacturing PMI data, however, showed a sharper drop than economists had expected.
 
Old Mutual multi-manager head John Ventre has been buying Chinese equities throughout 2014 and now has an overweight position in the country.

More subdued data is welcome, he argued, as it shows true growth rather than government initiatives. In particular, improvements in manufacturing data against a backdrop of a slowing housing market show growth is fuelled by more than credit.

Latest data suggests China’s policy mix is working

china-pmi

He said: “We have been buying Chinese equities on the basis that they were far too cheap. They were being priced on the basis of a financial crisis, and we thought they would muddle through.
 
“I am hearing a lot of people talking about upping their China weights, from large underweights to smaller underweights, so I think this has a lot further to run.”
 
Valuations of cyclical stocks look attractive, according to JO Hambro Capital Management Asia ex Japan fund manager Samir Mehta. He has been adding exposure through Soho China, a commercial property landlord, and his largest holding is China Mobile.
 
The Chinese government’s overhaul of state-owned enterprises and improved connections between stock markets drove him to increase exposure, he added.
 
While 2014 opened with concerns about China’s shadow banking system, Barclays Wealth equity strategy head William Hobbs said some of the more apocalyptic fears have begun to fade.
 
He told investors: “For some time, we have felt that policymakers in China have had the means and the will to avert economic catastrophe, and this has proved true so far.”
 
The recent bounce in Chinese equities is “easily justifiable”, and exposure makes sense for longer-term investors, he added.
 
China’s attractiveness is also shaped by the shrinking number of emerging market alternatives.
 
AXA Framlington Asia head Mark Tinker noted MSCI is offering indices excluding Russian banks, which could drive investors to look at unloved Chinese financials once more. He said: “It is difficult to tell if this will induce much distressed selling, but certainly it is making a few people appreciate Chinese banks – including quite a few Russians, apparently.
 
“Short Russia and long China certainly reflects the relative political and economic strength, and may well be an emerging trading strategy in some areas.”
 
However, some managers remain sceptical, and fears of a potential banking crisis remain in the background. Cornelian Asset Management chief investment officer Hector Kilpatrick said the economy is on a downward trend: “While the authorities have done a good job at papering over the cracks recently, overall economic trends continue to weaken.”

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