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China’s big-cap growth expected to beat smaller peers for record sixth straight quarter in 4Q

Report suggests Chinese households may divert as much as US$908.8bn into equites from domestic wealth management products over next two years, mainly buying large banks and similar that generate steady dividends

PUBLISHED : Wednesday, 11 October, 2017, 9:45am
UPDATED : Wednesday, 11 October, 2017, 10:35pm

The performance of China’s biggest publicly traded companies have beaten smaller growth firms for a record fifth straight quarter, and most analysts now expect that momentum to continue into the last three months of the year.

A gauge measuring the implied volatility on the 50 most-valuable stocks on the Shanghai exchange is now trading near a four-month low, in a clear signal the sector still has lots more room for growth.

Morgan Stanley thinks Chinese households may divert as much as 6 trillion yuan (US$908.8 billion) into equities from domestic wealth management products over the next two years, mainly buying large banks and similar that generate steady dividends.

Dai Ming, a fund manager at Hengsheng Asset Management in Shanghai, adds the market likes the theme of earnings visibility, as concerns continue over the uncertainty of the macroeconomy.

“Big-caps aren’t cheap after a good bull run, but they still have the chance to further extend their performances due to secure earnings outlooks,” said Dai.

He said he likes banks and insurance companies, particularly, because they have an edge when it comes to valuations and have solid earnings prospects.

Large companies have been outperforming smaller growth stocks every quarter since the second half of last year.

Chinese traders shifted their attention to large-caps in search of safe havens, after the government started squeezing excessive liquidity from the financial industry, in an effort to deflate what were considered as bubbles forming among smaller firms.

As a result the SSE 50 Index of the top 50 stocks on the Shanghai bourse has climbed 26 per cent over the past five quarters, while the ChiNext gauge of start-ups has retreated 16 per cent in the period.

The big-cap gauge had added 0.4 per cent to 2,707.52 by Wednesday’s close, less than 2 per cent shy of its two-year high set in August.

The implied price swing level of the gauge, meanwhile, dropped to its lowest level since May by the end of September, and the last time its did that, underlying stocks rose 15 per cent in the following five months.

Industrial and Commercial Bank of China and the nation’s other biggest domestic lenders still expect fund inflows, Morgan Stanley said in a report this week, thanks to their stable dividend payouts, as Chinese households allocate more of their assets to equities after policymakers’ clean-up of the financial sector slowed sales of wealth management products.

The study expects stock investment as a percentage of Chinese household assets to rise to about 16 per cent in 2019, from the current 13 per cent now, according to its analysts led by Richard Xu.

“Many investors shifting to the equity market had previously invested in high-yield, fixed-income products, so we believe they now favour stocks with good dividend yields and more stable returns,” Xu said in the note. “This will support a further re-rating of China banks.”

Many investors shifting to the equity market had previously invested in high-yield, fixed-income products, so we believe they now favour stocks with good dividend yields and more stable returns. This will support a further re-rating of China banks
Morgan Stanley said in a report this week

ICBC, the nation’s biggest bank by assets, currently offers dividend yield of 3.8 per cent, while the return rates for China Construction Bank, Bank of China and Agricultural Bank of China are at least 3.9 per cent, according to separate data compiled by Bloomberg. That compares with China’s one-year benchmark deposit rate of just 1.5 per cent.

Banks make up the biggest weighting within the SSE 50 Index with 34 per cent, the Bloomberg data showed.

Shenwan Hongyuan Group, China’s third largest brokerage, however, is confident smaller firms could re-gain favour with investors, expecting their overall earnings growth to gather pace.

Its analysts led by Wang Sheng are bullish that their third-quarter profit growth may accelerate to 35 from 31 per cent in the first half, based on latest earnings forecasts made by small-cap companies, while it’s more bearish on mainboard company earnings growth, due to the higher base effect this year.

The Bloomberg data also suggests companies on the Shanghai Composite Index, dominated by bigger firms, are set to post a collective 13 per cent in profit growth next year, down from 20 per cent in 2017.

Others think, however, that lower big-cap valuations are likely to offset slowing growth concerns.

The Shanghai Composite is now valued at 18 times reported earnings, two thirds less than the ChiNext gauge.

Banking and insurance stocks, which account for a quarter of the index’s weighting, are the cheapest of industry groups.

The 21 banks on the index trade at an average price-earnings ratio of 9 times, while the multiple for the five insurers is 21 times, the Bloomberg data showed.

“I’ll be focused on large caps for the rest of year, as they are pretty stable either in terms of their share price or earnings,” said Wei Wei, a trader at Huaxi Securities in Shanghai. “They are nearly riskless bets.”

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