After a long, frightening battle, on Monday U.S. politicians acted to take a catastrophic U.S. default off the table. And after weeks of growth stunted partly because of worries about that default, China stocks in Hong Kong are poised to rise.
“Historically in the longer term this sort of crisis creates very good buying opportunities for Chinese stocks,” said William Fong, investment director of Baring Asset Management (Hong Kong). “When it is eventually sorted out, China stocks track much higher.”
Not that there won’t still be some short term rough spots. A sharp drop in Chinese stocks in Hong Kong on Tuesday underlined that.
Fong said that Chinese July PMI figures announced Monday showed that manufacturing growth continued to decline. “In this situation the Chinese stock market will be a bit volatile,” he said.
But he also noted Chinese stock valuations are tempting, with the China MSCI Index at 11 to 12 times PE for forward earnings. And like many other analysts he expects China’s inflation and economic tightening to ease soon. This would pave the way for robust stock gains.
Investors who agree that a rally is gathering steam have to decide how to get the best increase from their investment dollars.
Chinese banks are the old reliable proxy for investors who want to cash in on China’s fast economic growth. In recent months bank stocks have lost ground due to concern over large sales of stock by strategic investors. Fong said this is a serious problem because a number of “lockup” agreements that prevent such sales will end soon.
On Tuesday a share placement by big Chinese bank ICBC dragged down the banking sector.
Another fear is that loan quality will suffer because central authorities are pushing banks to take on large debts from local government infrastructure projects. Here, Fong thinks worries are overblown. For one thing, banks have ample reserves for bad debts. For another, most of the infrastructure projects are in wealthy, coastal regions of China. Many of them will actually make money.
Overall Fong said beaten-down bank stocks have their attractions. For one thing he expects China’s economy to be “quite strong” in the medium term. But Fong, who is lead manager for Baring’s China Select Fund and China Growth Fund, said the company underweights banking counters.
“We don’t think they’re unattractive, but there are better investments,” he told Equities.
Many of those investments are in the consumption sector, Fong said. “Banks tend to lag when the market starts to pick up,” he said, “but small and mid-cap (consumption) companies grow rapidly.” He also pointed out that banks form a big component of market indexes. “If you want to outperform the index, you need to own small and medium-sized companies like those in the consumption sector.”
But not all consumer goods-related companies are equal. Last year Baring noticed that more and more Chinese consumers were going upscale. “We switched our focus from mass consumption stocks to luxury goods stocks,” Fong said.
Baring does not publicly recommend individual stocks, but Fong said the brokerage’s purchases cover a wide range of high-end retail brands with fast growth. They range from garment and men’s wear companies to a firm that sells luxury cars like BMW and Audi.
Surprisingly, Fong is enthusiastic about department stores, which have generally been a haven for bargain-hunting shoppers. But times are changing.
“In the past luxury items made up below 20% of total sales, but in recent years they have contributed more than 40% of the sales for some department stores,” Fong said. End
DAILY FIX -- Worries over U.S., European Economies Hit Stocks
Hong Kong Blue Chips: -242, -1.1%, to 22,421, 08-02-11, Hang Seng Index
Chinese Stocks in Hong Kong: -262, -2.1% to 12,279, 08-02-11, HSCE Index
Shanghai Stocks: -0.9%, 2,679, 08-02-11, Shanghai Composite Index.
Chinese Stocks in the U.S.: +0.1 to 441.9, 08-01, Bank of New York Mellon, ADR Index-China
Insight: Worries about U.S. and European economies trumped good results from market giant HSBC (00005), pulling Hong Kong down in slow turnover. Chinese banks fell as ICBC slumped 3.7% because of a share placement. KGI Research
Quotable: "We expect HSI will perform better in August but do not expect any substantial advancement." BOCOM International. 8-2-2011.
Chinese Company to Watch: "Auto stimulus policies in Beijing should boost confidence of Chinese auto market. Zhongsheng Group (881) is a leading automobile 4S (sales, spare parts, service and survey) dealership group in China with a focus on mid-to-high-end brands such as Toyota, Nissan and Honda, as well as luxury brands including Mercedes-Benz, Lexus and Audi." Guoco Capital. 8-2-2011
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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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