'New economy' shares drop on doubts over mainland transition
After strong gains, technology, health and consumer shares are losing their lustre on doubts that Beijing can achieve an economic transition
Last year's most-profitable bets on the mainland economy have turned into money losers this year as policymakers send mixed signals on which industries will lead expansion.
After surging at least 20 per cent for the biggest gains in mainland stocks last year, gauges of technology, health care and consumer shares have all lost more than 6 per cent this year. The companies, tied to what analysts have dubbed the mainland's "new economy", are now falling in tandem with "old economy" stocks in state-controlled sectors such as commodities and finance that fuelled growth in the past decade. All 10 industries in the CSI 300 Index sank in the first half of the year, the broadest losses in four years.
The declines suggest investors may be doubting Beijing's commitment to fostering a shift towards technology and services, putting at risk returns on smaller companies that have been the best in the past two years and the biggest among initial public offerings. While President Xi Jinping said in May the mainland must adapt to a "new normal" pace of growth, in which innovation plays an increasing role, the central government has also sped up state spending and eased credit curbs as the weakening property market puts its 7.5 per cent gross domestic product growth target at risk.
"The market is now pricing in the risk that China won't make a successful transition," said Wang Zheng, the Shanghai-based chief investment officer at Jingxi Investment Management, adding that the shift "will be much more difficult".
New economy stocks advanced after the State Council approved plans in 2012 to boost seven "strategic" industries, including technology. The government included in its five-year plan a target of lifting the proportion of service industries in the economy to 47 per cent by next year, from 46.1 per cent last year.
Less than six weeks after Xi's comments on the mainland's new normal, Premier Li Keqiang said in London that the government was "adjusting its economic operations to ensure the minimum growth rate is 7.5 per cent". Policymakers have lowered reserve requirements for some lenders, sped up spending of state funds and announced plans to build more railway lines.
The leadership is trying to prop up growth amid a weakening property market that dragged down home prices in May and June, the first declines in almost two years.
"The government won't be willing to take in the short-term pain, so they are following a two-step approach: buy time, and if the economy stabilises, then they will focus more on the reforms," said Shen Minggao, Citigroup's head of China research.
Shen, who preferred new economy shares last year, now favours old economy stocks, in part because they are cheaper and the mainland's growth rate is stabilising. The manufacturing sector expanded last month at the fastest pace this year.
The CSI 300 Materials Index, whose biggest constituents include Anhui Conch Cement and Zijin Mining, is valued at 15 times estimated earnings for the next 12 months while the index of financial companies has a ratio of 5.5. Benchmark gauges of technology and health care companies have multiples of 23 and 19, respectively.
The CSI 300 Healthcare Index has dropped 11 per cent this year after a 23 per cent rally last year, while the technology gauge has slumped 7 per cent after surging 39 per cent last year. The CSI 300 Consumer Discretionary Index has lost 6.9 per cent, versus an 8.7 per cent rally in the equivalent gauge for emerging markets.
"We need to see economic growth accelerate, or the transformation of the economic structure succeed," said Chen Ruiming, a Shanghai-based strategist at Haitong Securities. "But neither of the two will materialise in three to five years and that'll be a long process."