Price and policy fears drive Chinese investors into cloistered stocks

Yadea group

08/03/2021 09:03

By Samuel Shen and Andrew Galbraith
    SHANGHAI, March 8 (Reuters) - Worries about the frothiness
of China's stock market and steps authorities might take to rein
it in are forcing investors out of popular technology and
consumer sectors and into small-cap shares and other sequestered
stocks in sectors such as banking.
    That churn has seen investors rush out of richly valued
market darlings such as Tencent Holdings Ltd  0700.HK  and
Meituan  3690.HK . Shanghai-listed spirit maker Kweichou Moutai
Co Ltd  600519.SS , a popular bet on China's rising consumerism,
has plunged 25% from its Feb. 18 high.
    The Hang Seng TECH Index  .HSTECH , which tracks Hong
Kong-listed tech giants including Tencent and Alibaba Group
Holding Ltd  9988.HK , plunged more than 6% on Monday, extending
a decline that has brought the benchmark 27% off its peak hit
just two weeks ago.
    "The bubble is bursting," Dong Baozhen, a Beijing-based
hedge fund manager said, referring to the sharp sell-off in tech
and consumer stocks. The spectre of inflation and tighter credit
is a "killer" of high-flying stocks, he said.
    Instead, there are signs of money seeking shelter in banking
- once shunned for fear of virus-related bad loan exposure - and
unfashionable small-cap stocks, as well sectors poised to
benefit the most from economic recovery, such as energy
 .CSIEN . Amid bloodshed in tech, financial stocks  .CSI300FS 
have been relatively firm while an index tracking small firms
 .SZSME  has barely budged.
    Growth-oriented stocks have suffered globally in recent
weeks from rising concerns over inflation. In China,
additionally, fears that authorities are keen to reduce
generous, pandemic-era stimulus has led to near-panic selling of
such stocks.
    At the annual meeting of China's National People's Congress
this month, authorities set an economic growth target of above
6% for the year, underwhelming market expectations.
    The goal is conservative, as if "creating room for
policymakers to take action to contain risks of asset bubble in
both equity and property," Citi Private Bank analysts said in a
client note on Monday.
    In addition, comments from top banking regulator Guo Shuqing
against asset bubbles last week also sent a hawkish message
reminding markets that China is the world's most-expensive
market for non-financial equities.
    Even after the recent sell-off, Moutai's price is 55 times
trailing earnings, while Tencent trades at 45 times.
    The combination of high valuation and the government's
policy tendency "could be very meaningful for Chinese equities
because policies still heavily influence the market," Citi said,
forecasting another 10% drop in China's benchmark CSI300
 .CSI300 . The index hit record high on Feb. 18 and has lost 14%
since. 
    
    HIDDEN GEMS
    Michelle Leung, chief executive of China-focused asset
manager Xingtai Capital, said the bubble in China's big-cap tech
and consumer staples was partly fuelled by global investors'
rush to increase exposure to China as it recovered from the
COVID-19 pandemic.
    "If you're trying to buy China quickly, the easiest thing to
do is to buy an exchange-traded fund, an index fund or a big-cap
consensus name," and that has caused crowding in Moutai,
Alibaba, Tencent and the like, she said.
    Many consensus names are still valued at 60 times their
earnings or greater, which "doesn't quite make sense at this
point," said Leung, a value-driven, bottom-up investor.
    Leung's half-a-billion-dollar long-only China fund has
outperformed the MSCI China Index by around 20% annually over
the past three years, vindicating a strategy of "buying hidden
gems" when most investors are chasing momentum.
     Her portfolios include electric scooter producer Yadea
Group Holdings Ltd  1585.HK  and property management firm A
Living Smart City Services Co Ltd  3319.HK , bought at
price-earnings ratios of 8 and 11 times respectively.
    Brian Bandsma, a New York-based portfolio manager for
Vontobel's Quality Growth Boutique, said he is shifting to
defensive stocks because companies such as Meituan  3690.HK 
and Nio Inc  NIO.N  showed clear over-valuation, even placing
them in bubble territory. 
    Liam Zhou, founder of Shanghai-based Minority Asset
Management, recommended buying Chinese banking stocks, citing
the sector's low valuation and reduced risks due to the
government's deleveraging campaign. 
    Chinese banks  .CSI000947  are perennial laggards but have
rebounded to a three-year high in recent weeks, and the sector 
still trades at a 30% discount on average to their net assets.

 (Reporting by Samuel Shen and Andrew Galbraith; Editing by
Vidya Ranganathan and Christopher Cushing)
 ((samuel.shen@thomsonreuters.com;  +86 21 20830018; Reuters
Messaging: samuel.shen.thomsonreuters.com@reuters.net))