China Leadership Change Boosts Consumer Stocks, Matthews Says
Valuations on the Shanghai Composite have fallen to 9.8 times estimated profit, compared with an average multiple of 17.8 since Bloomberg began compiling weekly data on the gauge in 2006. The MSCI China Index of mostly Hong Kong-traded stocks is valued at 10.2 times profit after gaining 14 percent in 2012. “The overall valuations of Chinese companies are still quite attractive,” Gao said. While declining to name which stocks he is buying, Gao said he favors companies such as supermarket operators, department stores, technology firms and gaming stocks.
BlackRock Inc., the largest money manager in the world, recommends buying China stocks for long term investment on “attractive” valuations. Investment opportunities which could follow structural reforms are “enormous,” Jing Ning, a BlackRock portfolio manager, wrote in an e-mailed note today.
Eoin Treacy's view The Chinese market has been waiting for a catalyst to initiate investor demand for stocks which have returned to historically attractive valuations. The decennial transition of power within the Communist Party begins today and the new make-up of the Politburo will be announced next week. The full handover will be completed over the next six months as Xi Jinping consolidates his rule. On its own this might not be enough to spur investor interest. What the new administration does to foster economic growth, by potentially lowering short-term interest rates, increasing spending, cutting taxes or other measures will probably have more of an impact.
The evolution of a vibrant middle class remains the central policy goal of the Chinese administration. At present China is a middle income country on a PPP basis. If it is to achieve its lofty ambitions, it will need to add an additional aspect to its growth strategy. The challenge has long been how to unlock the massive pool of savings held by consumers. Supports for social security, medical care, the minimum wage, workers rights and the environment have all been aimed at achieving this goal.
The CSI300 Consumer Staples Index has been largely rangebound since late 2010 and has paused in the region of the lower boundary, near 5000, since August. It will need to hold above that area if the medium-term upside is to be given the benefit of the doubt. The MSCI China Consumer Staples Index which includes Hong Kong listed shares exhibits a more well-defined upward bias and continues to rally from the lower side of its range.
The Hong Kong Hang Seng Index encountered resistance this week in the region of 22,000 following six consecutive weeks to the upside. At least a pause and consolidation is underway but a sustained move below 21,400 would be required to question medium-term potential for continued higher to lateral ranging.
The US listed Matthews China Fund, mentioned in the above article, invests in mainland China and Hong Kong and has the capability to also invest in Taiwan listed companies. It has a 0.68% management fee and a 2% early withdrawal fee. The fund retested the 2007 high by early 2010, pulled back and has been ranging above $20 since mid 2011. A sustained move below $21 would be required to question medium-term scope for continued higher to lateral ranging.
The Atlantis China Healthcare fund is listed in Ireland, has a management fee of 1.41%, performance fee of 20% and a back load of 3%. It has been trending consistently higher since May and is approaching the 2010 peak. While somewhat overbought in the short-term, a sustained move below the 200-day MA, currently near $1.17, would be required to question medium-term scope for additional upside.