Managers anticipate recovery in Chinese equity market during second half of year as uncertainty over interest rates and the renminbi gives way to optimism
Managers expect Chinese equities to recover during the second half of the year, as uncertainty over interest rates and the renminbi gives way to more bullish sentiment about the country.
China’s equity markets have been weak performers this year, with the Shanghai SE A share index declining 21% year to date, compared to a return of 0.88% for the FTSE All Share.
Martin Currie’s James Chong, manager of the recently launched China fund, says so far this year investors have been wary.
“China has not been performing well as investors have been worried about whether the Government might tighten monetary policy. However, the Government is aware the global economy is fragile and so will probably hold off from tightening too soon,” he says.
“I think the turning point will be Q4, when investors will start looking towards 2011 and see earnings have been strong. I think we will see the bottom of the market in October.”
Christina Chung, who runs the £270m Allianz China fund, agrees investor concern over policy tightening measures have been behind the market weakness so far this year. “Therefore, as this concern begins to ease, sentiment should improve,” she says.
Consequently, managers anticipate buying opportunities, with Chong holding a higher cash position than normal. He had 7.2% in cash at the end of June, though this was also partly due to new inflows.
Along with Chung, the manager of the £438m Royal London Far East Growth fund Edward Chan favours financials.
“The consumer story is still there in China, but these stocks are too expensive. As a result, I am more positive on banks as they reflect what is happening in the domestic economy and in terms of P/E they are below 10 times,” Chan says.
Meanwhile, Chung has a larger position in insurers, but has plans to increase her fund’s bank weighting.
“We believe the banking sector is reasonably valued at the moment. However, we now need to wait for the equity-raising measures to come through for all these major Chinese banks. Then we will be carefully looking for the best opportunities to increase our allocation to selected stocks and increase our exposure to the banking sector,” she says.
However Martin Currie’s Chong is more skeptical, pointing to the threat of bad loans and the banks’ need to increase their capital buffers.
Banks expected to come to the market in the second half to raise funds include Bank of China, ICBC and the China Construction Bank.
“I have an underweight to banks because in 2009 monetary policy was extremely loose, which will inevitable lead to an increase in non-performing loans,” Chong says.
“Banks are also facing recapitalisation pressures so there will be a lot of fundraising.”
Meanwhile, Chong and Chung are tipping IT stocks to outperform while Chan believes the sector will be impeded by slower global growth.
Chung says: “We continue to be positive on this sector, with ongoing positions in some of the mid-cap stocks we believe are likely to rise on the back of increasing IT services spending in China,” she says.
However, Chan is not convinced: “I have detected there is now quite a lot of inventory build-up and the demand may not live up to the hype,” he says.
“I am expecting Europe to have some problems and I do not think the slack will be taken up by the rest of the world.”
Another sector attracting interest from China managers is materials, including the major mining groups.
Chan, whose Far East Growth trust can invest in Australia, has exposure to materials through the country’s large-cap names, with holdings including BHP Billiton and Rio Tinto.
“Partly this is a reflection of my positive view on China. In addition, Australia has a well managed economy, there is more or less full employment, and the threat of a resources tax has receded,” he says.
“I have recently increased my weighting to the steel and steel-related sector as commodity prices are already at a level where these players are no longer profitable and I do not think they can fall any lower.”
Meanwhile, Chung says the sector has underperformed to an extent that the risk/reward profile is now favourable.
“Within materials, we are particularly positive on the cement producers against a recent background where investors have been, in our opinion, overly concerned about the supply and demand situation for cement within China,” she says.
