UBS Asset Management bullish on China’s large-cap shares
The inclusion of Chinese blue chips in MSCI’s emerging market index next year will bring in more inflows boosting stocks further, says fund manager Shi Bin
The rally in China’s large blue-chip companies is most likely to continue, as overseas investors add to holdings of the stocks to reflect mainland equities’ inclusion in global benchmarks and valuations remain reasonable, according to UBS Asset Management.
Leading companies in their respective industries were likely to attract more fund flows from foreign investors after global index compiler MSCI adds the nation’s 222 large-caps to its emerging-market benchmark in the middle of next year, said Shi Bin, a portfolio manager at the fund with US$7 billion in assets under management. There is no bubble in the big-cap shares as earnings continue to grow and the valuation is only half that of the broader market, he said in Shanghai.
“They have strong fundamental support,” he said. “They were undervalued significantly and are still on course to return reasonable valuations.”
Government’s deleveraging campaign and stretched valuations of smaller firms have spurred buying of large companies this year, pushing up the CSI 300 Index of the 300 most valuable stocks on the Shanghai and Shenzhen stock exchanges by 21 per cent. Even after the run-up, the big-caps are still at least 50 per cent cheaper than small growth stocks in valuations, according to data compiled by Bloomberg.
Shi’s fund investing in mainland’s A-shares has returned 64 per cent so far this year, beating 99 per cent of its rivals, according to Bloomberg data.
His top holdings included Ping An Insurance Group, Jiangsu Hengrui Medicine and Kweichow Moutai as of the end of August, the data showed. His two other funds investing in offshore China stocks, including companies listed in Hong Kong and the US, have delivered returns of at least 45 per cent.
Liquor giant Kweichow Moutai surged 15 per cent in two days through Friday after profit for the first nine months jumped 60 per cent from a year earlier. That pushed the stock to 35 times estimated earnings, the highest level in almost six years, Bloomberg data showed.
Shi said Kweichow Moutai’s valuation is still within reasonable range, as the current share price may not fully reflect the growth potential of the maker of fiery Chinese liquor, which still has room to raise product prices amid increasing demand.
UBS Asset Management also likes health care, e-commerce and education service industries, as China is in the process of transforming its economy to more consumption-based from credit-fuelled investment, Shi said.
“A drop in China’s GDP growth probably means more investment opportunities for us,” he said.