Across The Border

China’s ‘best equity strategist’ joins others in pointing investors towards consumer and construction in Q4

The 19th Party Congress in October, will be closely watched for clues as to how many billions are likely in government infrastructure spending

PUBLISHED : Wednesday, 27 September, 2017, 2:14pm
UPDATED : Wednesday, 27 September, 2017, 10:38pm

China’s newly crowned “best equity strategist” is tipping consumer and construction stocks in the fourth quarter, as market sentiment turns more defensive, with risk of slowing economic growth firmly on the horizon.

Xun Yugen and his team at Haitong Securities in Shanghai have just been ranked first for equity strategy research, by the respected Shenzhen-based New Fortune magazine, and in his latest round of predictions he is also pointing investors towards home appliance makers and other consumer companies to outperform until the year end, due to their earnings visibility, as poorer-than-expected key August economic data prompts investors to seek safe wagers.

“The current backdrop of the macro-economy is more conducive to consumer and counter-cycle sectors,” said Xun.

Elsewhere, he sees builders as likely to benefit from increased expenditure on infrastructure projects as the government raises fiscal spending to stave off the slowing economy.

Xun’s most-recent calls are already proving more than prescient.

A gauge of consumer staples stocks on the CSI 300 Index rose to a record high on Monday after a month of consolidation.

Beijing Orient Landscape & Environment, a construction company, also rose to an all-time high last week, and is among the top tips of various brokers, including Zhongtai Securities, which

predicts its rapid earnings growth seems secure after the company signed new contracts worth 47.2 billion yuan (US$7.1 billion) this year, more than five times its 2016 revenues.

Orient’s profit may increase 57 per cent in 2017, Bloomberg data has predicted.

Its stock dropped 1.9 per cent to 20.20 yuan on Tuesday’s and remained unchanged on Wednesday, but that only trimming its advance to 43 per cent in 2017.

“That’s all a reflection of what major market players like now,” said Wang Chen, a partner with Xufunds Investment Management in Shanghai.

“We can see they are concerned about the economy in the fourth quarter, believing this round of re-stocking is over and demand is weakening.”

Fresh data a fortnight ago from the statistics bureau further cements Wang and Xun’s views.

It shows the nation’s industrial production, fixed-asset investment and retail sales all trailed projections in August, which have prompted investors to dump commodity stocks – the best-performing sector over the previous three months – in favour of consumer companies.

The CSI 300 sub-index tracking raw material producers has lost 3.8 per cent since the data release while the consumer staples measure has risen 4.7 per cent in the span.

China’s economic growth is projected to slow to 6.7 per cent this quarter from 6.9 per cent for the three-month period ended in June, according to the median estimate of 36 financial institutions surveyed by Bloomberg.

Although producer prices rebounded in August, the gains – mainly driven by re-stocking and a cut in excessive capacity this year – are considered unsustainable as demand from investment remains sluggish, according to Citic Securities.

Wang and Xun’s upbeat forecasts for consumer and construction companies are mirrored too by Shenwan Hongyuan Group, which also favour the two sectors, giving strong recommends to makers of Chinese liquor, leading companies in the pork-processing and diary industries, and Beijing Orient Landscape.

Deliveries of Moutai, the nation’s most expensive and most renowned fiery white liquor produced by market leader Kweichow Moutai, are expected to rise more than 25 per cent from a year earlier, says Lyu Chang, an analyst at the Shanghai-based brokerage.

He also thinks Henan Shuanghui Investment & Development, China’s biggest pork processor, and Inner Mongolia Yili Industrial Group, the largest diary maker, are good buys, suggesting valuations are probably still below what they should be.

Chen Li, a strategist at Credit Suisse Group in Hong Kong, adds that investors shifting their attention to consumer stocks “is the reaction to a potential slowdown after rapid economic growth”, adding that he also likes the look of “mass consumer stocks in the last quarter”.

Shenwan Hongyuan is also highlighting builders and construction firms to its clients as good bets, as policymakers may decide more needs to be spent on infrastructure projects, to counter slowing property investment after Chongqing and seven provincial capital cities unveiled a new round of measures to cool property prices by restricting home re-sales last week.

The holding of the 19th Party Congress, in Beijing from October 18, will be closely watched for clues as how many billions are likely in government infrastructure spending.

Shares in construction companies engaged in public-private-partnership projects – those jointly developed by the private sector and the government – could be the hottest buys in coming months, suggests Shenwan Hongyuan’s analysts, led by Li Yang, who are tipping a whopping 50 per cent rise for those class of shares over the rest of year, and earnings growth by the same rate, next year.

Look out for China Design Group and China Gezhouba Group, especially, it recommends.

Xun Yugen at Haitong reckons liquor makers and home appliance stocks carry more than 50 per cent chances of beating the benchmarks in the coming quarter, based on historical data from 2006 to 2016, as the last three months of the year are typically peak seasons for consumption. Cyclical commodity producers also tend to underperform in the period, he said.

His report adds these sectors have higher chances of outperforming the broader market in 4Q, not that they will outperform the benchmarks by 50 per cent.

Shares in Kweichow Moutai rose to a record 509.29 yuan on Tuesday in Shanghai, bringing its gain to 52 per cent for the year.

The company’s net income growth is due to accelerate to 28 per cent this year, the fastest pace since 2015, according to data compiled by Bloomberg.