Stock picks outside the comfort zone win out
Last year saw yet more proof that swimming against the tide pays. With the year starting out on a bearish note, still reeling from the global credit crisis, it is no surprise that defensive stocks were the order of the day.
But as a ranking of brokers by the South China Morning Post and StarMine, a Thomson Reuters company, reveals, the top performers last year were the ones who did not seek shelter in the comfort of defensive stocks.
Macquarie Research Equities took the top spot for recommendations on the Hang Seng Index in the 2010 SCMP-StarMine Broker Ranking, based on its performance last year. BNP Paribas ranked second and Taifook Research third. In the mid- and small-cap segment, Macquarie Research Equities again scored the highest, followed by BNP Paribas and Morgan Stanley.
Most analysts, at least in the first half of 2009 when caution was the buzzword in the market, sought defensive stocks - stocks that are considered immune to the vagaries of the market because of the nature of business of these companies, such as food, tobacco, oil and utilities.
But Singapore-based Adam Worthington, head of regional utilities and coal at Macquarie Research Equities, maintained 'underperform' on Hong Kong Electric Holdings throughout the year. As it turned out, the stock lost about 4 per cent through 2009 and underperformed the Hang Seng by 55 per cent.
'Asia had just started to come out of the recession and this company did not have as much leverage as others, so it was regarded as a defensive play,' said Worthington. 'At the beginning of the year, anyone would have gone for Hong Kong Electric,' he said, even as he chose not to, in view of the electricity supplier's low assets growth, heavy exposure to mature markets and unattractive dividend yield.
'It underperformed significantly last year although I think I am starting to warm up to it now.'
Another defensive dud last year was CLP Holdings. The company gained 4 per cent until March 3 last year, a significant advance at the time, but it was downgraded to a 'sell' on March 4. The recommendation was maintained by Taifook Research until August 24 as the stock fell back 2 per cent to underperform the Hong Kong benchmark by 64 per cent.
After a rocky beginning, many stocks rebounded from their lows as 2009 progressed. These included mainland conglomerate Citic Pacific, which had racked up HK$14.6 billion worth of losses on unauthorised currency derivatives the previous year.
But Taifook Research was again spot on, with its analyst, Cho Fook-tat maintaining a 'buy' on the Hong Kong-listed mainland firm throughout last year. The stock climbed 91 per cent last year and eventually outperformed the Hang Seng by 66 per cent.
'We make decisions based on the fundamentals and yes, sometimes, we have to be brave and contrarian,' Cho said. 'I think the share prices had already factored in the foreign exchange losses. Of course, they could drop even more but based on the fact that the company has good-quality assets and support from its mainland parent, the share prices didn't reflect the strong growth potential it had.'
The stock has now retreated slightly but Cho says the impact of the Australian government's proposal to impose corporate income taxes on mining firms including Citic Pacific, which invested heavily in Australia's coal and iron ore mining sectors, would be minimal.
Looking ahead, Cho believes Citic Pacific is still not trading at a level that reflects its fundamentals.
The ranking measured the performance of brokers over sets of stocks in two different ways: by the returns of their recommendations and the accuracy of their earnings estimates.
The benchmark used for Hong Kong was a market-cap-weighted return of all stocks trading and domiciled in Hong Kong. Firms were assessed in the Broker Rankings according to the average accuracy of their analysts' calls on the stocks they covered.
For the earnings estimates, Citi took the first place for the Hang Seng Index segment while DBS Vickers and BNP Paribas took the second and third place. For calls on H shares, BofA Merrill Lynch took the first position followed by Core Pacific-Yamaichi International and Daiwa.
In earnings forecast for H shares, the top three positions went to DBS Vickers, UOB Kay Hian and BNP Paribas.
They got it right
Macquarie Research Equities held an 'underperform' on Hongkong Electric Holdings for all of 2009 as it lost 4 per cent of its value, underperforming the Hang Seng by 55 per cent.
BNP Paribas kept a 'buy' on Tencent Holdings for the entire year as it soared 239 per cent and outperformed the Hang Seng by 178 per cent.
Tai Fook Research held a 'buy' on CLP Holdings from the beginning of 2009 to March 3 as it gained just 4 per cent but outperformed the local benchmark by 13 per cent. On March 4, it downgraded the stock to a 'sell' and kept that recommendation until August 24 as the stock fell back 2 per cent to underperform the benchmark by 64 per cent.
BofA Merrill Lynch remained bullish on Dongfeng Motor Group for almost 11 months as it sped up 380 per cent and outperformed the Hang Seng China Enterprises index by 322 per cent.
Core Pacific-Yamaichi International kept a 'buy' on Tsingtao Brewery throughout 2009 as it gained 169 per cent and outperformed the Hang Seng China Enterprises Index by 108 per cent.
Daiwa kept an 'underperform' on Beijing Capital International Airport for more than six months of 2009 as it fell 12 per cent and underperformed the Hang Seng China Enterprises Index by 24 per cent. It then held an 'outperform' for over two months, gaining 74 per cent to outperform the benchmark by 48 per cent.