- More volatility is likely ahead, but investors should look for survivors and thrivers, analysts say
- Sectors focused on fun, convenience and health are expected to outperform
The Chinese internet ecosystem of fun, convenience and health is expected to emerge even stronger in the "after-the-virus" world. And with related stocks now trading at bargain-basement prices, it's time for aggressive investors to start selectively shopping, analysts say.
Lockdowns, work- and school-at-home orders, and coronavirus fears have focused consumers more than ever on their smartphones and other digital devices. Gradually, new habits and mindsets shaped by the pandemic will point toward which companies and their stocks will outperform.
"People should pick companies that can survive or excel in this new environment," said Alex Wong, director of asset management at Ample Capital, who sees a "polarisation" in Hong Kong-listed stocks, with investors dumping traditional retail and travel for internet-connected stocks.
Technology stocks listed in Hong Kong and mainland China will benefit from a rise in demand for e-commerce, cloud services and the fifth-generation mobile network. Internet giants Tencent and Alibaba, which between them dominate everything from e-commerce to fin tech and cloud services in China, should do well, analysts say. So, should Kingdee International Software Group, which provides cloud services to businesses, they add. (Alibaba owns the South China Morning Post.)
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Meanwhile, a fitness kick in the wake of a pandemic will boost Chinese sports retailers Anta Sports and Li Ning, analysts predict.
Stocks of select domestic consumer companies in China " which first dealt with the virus and is expected to be the first country to bounce back " are also expected to do well. Hengan International, China's biggest diaper and sanitary napkin maker, food delivery service Meituan Dianping and hotpot chain Haidilao International are favoured by some analysts.
None of this is to say that volatility is over or that stock markets have hit their bottoms, analysts say. No one knows how long the pandemic will last, nor how much damage it will do worldwide.
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Nevertheless, for investors with nerves of steel, now may be the time to move " or, at least to draw up a pandemic-influenced shopping list, analysts said. Gauges show Hong Kong and China stocks are trading at attractive prices, having fallen steeply from mid-January, when the severity of the outbreak in the mainland became clear.
Meanwhile, Goldman Sachs and other analysts point out, bear market bounces " when considerable lost ground is regained " tend to happen quickly, and investors nervously sitting on their hands tend to miss out.
"It is premature to call for a bottom as new infections remain on an up cycle globally. The likely worst point of economic disruption is still ahead of us per our economists' projection, policy reaction function is still evolving, earnings expectations remain unrealistically high, and asset markets volatility continues to operate at high absolute levels," analysts at Goldman Sachs recently wrote.
"All this being said, history suggests that a powerful bear market rally has been a common feature in major downturns for Chinese equities. Specifically, there have been eight episodes where China fell more than 20 per cent from peak to trough (i.e. entering a bear phase) in the past two decades, and in seven out of the eight cases, there was a strong although sometimes short-lived rebound, averaging 17 per cent in magnitude and 53 days in duration, and recovering roughly 52 per cent of the initial drawdown," they wrote.
In addition to the mainland markets, China stocks are listed in the US and Hong Kong, where they make up more than 50 per cent of the Hang Seng's benchmark by capitalisation. Of the world's major markets, only China's benchmarks aren't in bear territory now, but they have come close to being that low.
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What professional analysts say they are seeing are a host of signals indicating that, at least by normal standards, a great many stocks are currently underpriced.
For example, one gauge known as the price-to-earnings ratio, which compares a stock or benchmark price to its per-share earnings, shows Hong Kong's Hang Seng Index at an exceptionally low 9.6 (down from December's already low 11.6 ), and the Shanghai Composite Index at 13 (compared with December's already low 14.2). Another gauge, the 14-day relative strength index, puts both indexes at around 43, not far above the 30 marker that signals stocks are oversold.
Meanwhile, the Hang Seng Index last week traded below its net asset value for only the third time in almost 30 years when the benchmark's price-to-book ratio of its market capitalisation compared to its net assets fell to as low as 0.92 times.
"We see opportunities in select quality Chinese names with secular growth outlook, such as e-commerce, networking and cloud, and related infrastructure investments," said Andy Wong, multi-asset senior investment manager at Pictet Asset Management.
The Swiss multinational asset manager has recently increased its exposure to telecommunication services providers, which like technology stocks are experiencing renewed demand but are trading at cheaper prices, according to its monthly asset allocation update for April.
International asset manager East Capital Group also prefers internet and e-commerce companies in China as they are more domestically-focused and protected from external shocks, according to Hong Kong-based portfolio manager Dmitriy Vlasov.
Meanwhile, the coronavirus has been a "game changer" for work-at-home and online-education platform providers, said John Choi, head of China internet Research at Daiwa Capital Markets.
"Before Covid-19, a lot of parents were sceptical about online education," Choi said. "But Covid-19 forced students to try out online options. It's a game changer. The online transformation was happening a bit, but Covid-19 brought it forward."
US-listed Chinese online education providers TAL Education Group and New Oriental Education Group are "buy" rated by Daiwa.
Meanwhile, work-at-home orders led to surging demand for cloud services, including video conferencing, collaboration and documentation.
The Beijing government in mid-February announced subsidies for local small and medium-sized enterprises to use such cloud products as virtual offices, video conferencing and customer relationship management. The discounts apply to such providers as Tencent, Alibaba and Kingsoft Corp., which is also listed in Hong Kong.
Other local governments in China will roll out similar measures to spur use of enterprise cloud services, predicts Choi, calling the pandemic "a trigger point for many Chinese enterprises to move forward their business digitalisation."
Those most likely to benefit beyond Alibaba, Tencent and Kingdee, are US-listed Baidu, mainland-listed Yonyou, which is available on the trading link known as the Stock Connect, all of which Daiwa rates as "buy" stocks, except Baidu which it rates as "outperform."
Morningstar, the huge US stock research firm, believes stocks have been oversold in the pandemic, and while it isn't calling a bottom, it says select stocks are poised for a post-virus bounce.
Among its picks for Asia is Trip.com, which is China's dominant online travel agency. Morningstar expects a U-shaped impact on demand from Covid-19, similar to what happened with Sars in 2002, and sees a return to capacity growth beginning in 2021.
"Increasing outbound travel from China, which has the largest population in the world, will give Trip.com scale and bargaining power in the global travel industry," Morningstar equity analyst Chelsey Tam recently wrote, noting huge potential for growth since only about 14 per cent of Chinese have passports versus 42 per cent of Americans.
Lockdowns have created a pent-up demand for travel, Tam argues, which will also eventually help battered Macau casino stocks, of which she especially likes Galaxy Entertainment.
Valuation levels of Hong Kong and China stocks are "attractive for almost all sectors" after an epic fall in global stocks in March weighed on the regional markets, said Dennis Lam, Hong Kong and China equities strategist at DBS Bank.
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"Certain vulnerable sectors are at bargain prices," such as travel companies, airlines, and Macau gaming stocks, Lam said.
Consumer stocks including hotel, restaurant, catering and apparel are likely to lead a bounce in Hong Kong and China markets, Goldman Sachs analysts say. Among them, Hong Kong-listed sportswear maker Li Ning has an upside of 91 per cent over the next 12 months, and rival Anta Sports could surge by 70 per cent.
Apart from technology and consumer stocks, analysts also see health care and utilities companies as smart bets.
"We like health care sector as we believe there will be an increase in health care investment after the Covid-19 outbreak," said East Capital Group's Vlasov.
Historically, utilities and materials stocks tended to lead market rebounds in the A-share market, as investors bet on policy easing such as greater infrastructure investment, Goldman Sachs analysts said.
And some are looking at opportunities brought by the recent collapse of oil prices. Crude oil has tumbled more than 60 per cent this year amid a Russian-Saudi row over production reduction and the demand-crushing pandemic.
"Most manufacturing industries will more or less benefit from low oil prices,"said Min Liangchao, a strategist at HSBC Jintrust Fund Management in Shanghai. "The direct beneficiaries are those whose costs are oil and derivative products, including building material makers and shipping lines."
But flashing caution lights are still among the markets' strongest signals, analysts warn.
"It's too early to start building broad-based equity positions," said Pictet's Wong. "Until a vaccine is discovered and widely administered, economic disruptions will be severe and prolonged."
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