Economic crisis offers good buying opportunities for Chinese stocks in the long term. That was the advice fund manager William Fong gave Equities in early August. The global crisis has deepened since then and Fong has adjusted his portfolio a bit.
But he recently told Equities: “My view is the same. The correction provides an opportunity to accumulate China stocks. In the medium term our view is positive.”
Some things have changed since Fong, the investment director of Baring Asset Management (Hong Kong), first touted the long-term attractions of China stocks. At that time the U.S. had just avoided a catastrophic U.S. default. Then things got really bad.
After the political gridlock of the U.S. default debate the prospect of an American recession grew. Greece edged closer and closer to default. Hong Kong’s Hang Seng Index plunged 19.1% from August 2 to this Tuesday, even after a strong rebound the past four trading days.
Now after the market’s volatile swing lower in the last two months, Fong, who is lead manager for Baring’s China Select Fund and China Growth Fund, said opportunities are even more clear. He noted that the MCI China Index has fallen to levels last seen in the depths of the 2008-09 financial crisis. “From a value perspective stocks are very cheap,” he said.
Deepening crisis and sharply lower stocks prices have, however, reshaped Fong’s portfolio.
Barings put more money in highly liquid, big-cap stocks “to ride through this volatility,” he said. That resulted in putting more into big companies in the underweighted energy sector.
Banks are also still underweight, but Fong thinks they are more attractive now after aggressive selling. He also thinks concerns about banks’ poor asset quality are overdone. Loans to local governments for infrastructure projects are a problem, he said, but they make up just 14% of lending. The remaining 86% of the loans are healthy. “The correction (in banks) was a bit too much,” Fong said.
Overweight sectors are still consumer discretionary and information technology companies. “Overall there’s not a lot of change in our portfolio,” Fong said.
Predicting the Upturn
He acknowledged it is tough to predict when long-term investors will be able to cash in on a big China stocks rally. Fong monitors three areas for signs of a sustained upturn.
*Chinese inflation and property prices. “If they peak, it is a sign that may lead to loosening monetary policy,” Fong said. There isn’t one inflation figure to look for, he said, because Chinese leaders balance inflation with growth. If growth falters, for example, authorities may accept a higher inflation figure.
There is a good chance inflation will be low enough in November or December, Fong said, given weak demand for Chinese exports from slowing Western economies.
*Macro economics. By this Fong mainly means the European debt crisis. “If we see more resolve to end this crisis, we believe the effect on the Chinese stock market will be positive.” The current four-day rally has been fueled by evidence France and Germany are serious about recapitalizing struggling European banks.
*China’s A-share stock market. “The market is very sensitive to (government) policy,” Fong said. “If it starts to stabilize it will support (Hong Kong) stocks.”
Meanwhile, long-term investors will have to maintain their nerve through more volatility. End
DAILY FIX -- China Banks Lead the Way
Hong Kong Blue Chips: +431, +2.4%, to 18,142, 10-11-11, Hang Seng Index
Chinese Stocks in Hong Kong: +388, +4.4% to 9,257, 10-11-11, HSCE Index
Shanghai Stocks: +0.2%, 2,349, 10-11-11, Shanghai Composite Index.
Chinese Stocks in the U.S.: +12.8,to 363.0, 10-10-11, Bank of New York Mellon, ADR Index-China
Insight: Hong Kong blue chips opened 730 points higher in line with a global rally caused by German and French efforts to ease Europe's credit concerns. Profit-taking cut into gains, but Hong Kong still ended sharply higher. Chinese banks, which just received investment from the central government's investment arm, posted robust gains. Agricultural Bank of China (ACGBY) surged 12.8%. KGI Research
Quotable: "We expect stock market rebound to continue in near term while the Hang Seng Index may reach 18,500 this week." Guoco Capital. 10-10-11
Chinese Companies to Watch: "Over-sold" railway equipment counters, such as CSR Times Electric (3898) and CSR Corporation (CSRGY). "According to the Ministry of Railways, national railway passenger and freight traffic registered rapid YoY growths during the first three quarters of 2011 and surpassed annual target." Haitong Securities. 10-11-11
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For a list of Chinese companies sold in the U.S. and information on each company go to http://www.adrbnymellon.com/dr_country_profile.jsp?country=CN
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