- Final part of the year isn't looking good, analysts say
- Chinese banks, developers and home appliance makers should be looked at
Yep, it has been a hot start of the year for Chinese stocks. But don't expect the final lap to be so sizzling.
Analysts who have made excellent calls this year are turning cautious.
They suggest investors look at undervalued banks and property developers, as economic growth risks moderating and the outlook of the trade talk remains elusive.
The US said on Friday there was a partial agreement on trade.
Despite a positive change on trade noted out of Washington on Friday, investors should be cautious, said Chen Li, chief economist at Soochow Securities in Shanghai.
His view was echoed by Hong Hao, Hong Kong-based managing director at Bocom International Holdings, who said investors should turn more defensive for the end of the year.
Chen correctly predicted early this year a rally in the mainland-traded stocks in the first quarter, while Hong accurately forecasted the boom-to-bust on Chinese equities in 2015.
"The downside pressure on China's economy is building up in the following six and 12 months," said Chen, who was also cautious about Chinese consume and technology stocks, the best-performing sectors this year, because of outsize gains and rich valuations.
The benchmark Shanghai Composite Index has risen 19 per cent this year, making it one of the best performers among the world's major stock markets. Most of the gains were made in the first quarter and the momentum fizzled out subsequently, as policymakers scaled back loosening policies and the trade tension resurfaced.
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The index rose 0.9 per cent to 2,973.66 at the close on Friday. The gauge would be stuck in a range between 2,700 and 3,100 in the fourth quarter and held back by the strong technical resistance of its average price over the past 850 day, according to Bocom International's Hong. The Shanghai Composite's 850-day moving average stayed at 3,043.12 on Friday.
"The gravity is downward. The consensus has underestimated the top's resolve to restructure the economy," he said.
Chinese policymakers can tolerate a deeper slowdown in growth to facilitate the transformation of the world's largest economy, averting large-scale stimulus measures and moving away from the reliance on the property market for economic growth, Hong said. The People's Bank of China has refrained from cutting the benchmark interest rate since 2015, even as the Federal Reserve led the global central banks in a recent round of lowering borrowing costs.
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"There wouldn't be much of an opportunity, if you bet on the index or the broader market amid the uncertainty of the trade talk and policy loosening," said Wu Kan, an investment manager at Soochow Securities. "On top of that, the market will be facing some profit-taking pressure as some investors choose to cash out toward the end of the year after a decent run this year."
Chinese banks, property developers and household appliance makers will be immune to shaky sentiment, because their valuations are low enough to hedge against a possible across-the-board decline and dividend yields are lucrative, Soochow Securities' Chen.
"Those stocks would be very appealing to investors who seek absolute returns," he said. "These companies will be even more attractive, should they post earnings growth." He did not recommend any specific stock.
A gauge of banks and developers on the CSI 300 Index has gained 3.9 per cent so far this month, the best performer among the 10 industry groups. The 22 banks on the measure traded at an average 6.5 times earnings and the multiple for the 17 property companies was 9.7 times, while the CSI 300 was valued at 14.1 times, according to Bloomberg data. Gree Electric Appliances, the nation's biggest air-conditioner maker, traded at 13 times.
Chen particularly likes banks, because their net interest margins, the difference between lending and deposit rates that comprises the industry's major source of incomes, were almost unhurt after the central bank moved to reduce corporate borrowing costs by revamping the mechanism of deciding the loan prime rate.
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The dividend yields for the banks and the developers were both 3.5 per cent, compared with the ratio of 1.8 per cent for the CSI 300 and the one-year deposit rate of 1.5 per cent, Bloomberg data showed.
Bank of Communications was the most generous in paying dividends among lenders, with the yield reaching 5.4 per cent, while Seazen Holdings was ranked the first place among developers, paying an amount of dividends equivalent to 5.3 per cent of its stock price.
Bocom's Hong recommends investor buy into defensive sectors, without naming nay specific industry or company.
Liquor king Kweichow Moutai and other consumer stocks, which have surged 77 per cent so far this year, seemed to have run out of steam, as the slowdown in the economy has already filtered through consumer spending. Retail and catering sales during the so-called golden week holiday, which runs from October 1 to 7 every year, recorded the slowest growth pace since the data was published since 2001 this year. The number of tourists to Hong Kong and home sales both fell during the break.
Still, box office sales more than doubled to a record 4.38 billion yuan (US$617 million) during the holiday, thanks to the contribution from three patriotic movies including My People, My Country and The Captain. That made studio stocks the winner of the gold week holiday, boosting shares of Wanda Film Holding and China Film.
Investors should avoid some small-caps that have made hefty gains this year and their coming earnings results were very likely to miss the estimates, which would make valuations look pricey, Soochow Securities' Chen said.
"Earnings growth isn't that optimistic and that means little room for valuation expansion," said Zhu Zhiyong, an analyst at AJ Securities. "That determines no big opportunity of the broader market and the opportunity will be in those companies that have the edge of valuations and real growth potential."
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