China stock market

Home appliance, liquor stocks are the new favourites of China’s mutual funds

Consumer stocks are looking cheap as rising incomes and a booming property market buoy profits

PUBLISHED : Monday, 24 April, 2017, 7:57pm
UPDATED : Monday, 24 April, 2017, 10:08pm

China’s mutual funds increased stock holdings in home appliance makers and liquor producers by the most in the first quarter, as they switched from small-caps into cheaper, larger companies, according to Citic Securities.

Fund managers raised their positions in those industries by 3.4 per cent, the nation’s biggest listed brokerage by market value said in a report. Their holdings of main board-listed stocks rose 2 per cent to 62.3 per cent in the period while the proportion in ChiNext-listed small firms was cut by 2.2 per cent to 14.7 per cent, it said.

Consumer stocks are the investment that’s driven by fundamentals and they can still deliver relative returns in the medium term
Wang Sheng and Fu Jingtao, Shenwan Hongyuan analysts

The new preference for consumer stocks underlines the hunt by investors for companies with secure earnings outlooks amid a weak economic recovery and the increasingly tough stance taken by regulators against market manipulation this year.

Home appliance and liquor companies are benefiting from a booming property market and rising incomes, as improved earnings make them look cheaper than other sectors.

The Shanghai Composite Index of bigger companies is valued at 16.8 times earnings, compared with 54.4 times for the ChiNext gauge. The multiple for Gree Electric, China’s biggest maker of air conditioners, is 11 times, and that for liquor maker Kweichow Moutai is 24 times. The two stocks have gained at least 19 per cent this year.

Gree dropped 1.2 per cent on Monday and Kweichow Moutai slipped 0.5 per cent, while the Shanghai Composite Index posted a 1.4 per cent loss, falling below the 200-day moving average for the first time in seven months, on concerns about tightening liquidity. The banking regulator is tightening a set of rules on lenders’ off-the-balance-sheet loans to reduce leverage in the financial sector.

Shenwan Hongyuan Group says the rally in consumer stocks will continue, as their profit margins are expected to keep improving in the next two or three quarters. Investors will switch out of cyclical companies – those that rely on economic strength for earnings – amid weakening producer prices.

“Consumer stocks are the investment that’s driven by fundamentals and they can still deliver relative returns in the medium term,” said strategists Wang Sheng and Fu Jingtao at the Shanghai-based brokerage.

Their view is shared by Sinolink Securities. Money managers will continue to be bullish on consumer stocks as they seek havens from a probablr drop in economic growth in the second half of the year, said Li Lifeng, a strategist at the brokerage.

Big-caps have been outperforming smaller firms in 2017 so far, as regulators increase their scrutiny of trading in small-caps to restore market order.

The chairman of the China Securities Regulatory Commission this month warned listed companies against issuing bonus stocks, a scam often used by executives to dump equities at high levels in collusion with speculators. The stock exchanges were also required to step up measures against excessive speculation in shares linked to Xiongan New Area, the new economic zone planned for Hebei province.