China stock market

Expect buying opportunities as China’s surging big caps dip in 2018, says Fidelity International

Financial, consumer and high-end manufacturing industries are worth focusing on this year

PUBLISHED : Friday, 19 January, 2018, 7:48am
UPDATED : Friday, 19 January, 2018, 7:48am

China’s big cap shares are probably set for more volatility this year, which will offer opportunities for investors to buy stocks at more reasonable prices, according to Fidelity International.

Rapid gains by shares of big mainland-listed companies in 2017 might put stocks in the danger of more than reflecting their intrinsic values in the short term and, therefore, lead to wilder swings, Lynda Zhou, a Hong Kong-based portfolio manager at the global asset management company, said in Shanghai on Thursday.

Major index-tracking big caps such as Chinese distiller Kweichow Moutai Company and Ping An Insurance Group advanced by at least 22 per cent last year, as stabilising economic growth bolstered corporate earnings.

“Only in times of bigger volatility can investors buy stocks at lower prices, and it is a good time to build positions,” said Zhou. “They aren’t expensive in valuation and don’t carry much of risks fundamentally.”

China’s Shanghai Composite Index caps longest streak of gains in 25 years

Zhou said her top stock picks would focus on companies in the financial, consumer and high-end manufacturing industries this year.

Fidelity International, previously a unit of Boston-based Fidelity Investments before being separated from the US business, is headquartered in London and has about US$411 billion in assets under management.

A mild sell-off has already hit some of the best-performing bigger companies in what analysts said was profit-taking pressure. Kweichow Moutai is down 4.8 per cent from its record high set last week, while Gree Electric Appliances, China’s largest maker of air conditioners, dropped 4.3 per cent from an all-time high. Both stocks surged by at least 92 per cent last year.

Corporate earnings will probably post double-digit growth this year and stock valuations are not too stretched
Lynda Zhou, portfolio manager, Fidelity International

Fidelity joined other global investment banks and money managers such as UBS and Robeco Asia-Pacific in predicting that mainland stocks would deliver a positive return in 2018 amid steady economic recovery.

“Corporate earnings will probably post double-digit growth this year and stock valuations are not too stretched,” said Zhou. “China’s stock market will benefit from the economic transformation in the long run.”

The benchmark Shanghai Composite Index rose by 0.9 per cent to 3,474.75 on Thursday, adding to a 5.1 per cent gain this year, as banks rallied to catch up with gains by other big cap shares. The gauge advanced by 6.6 per cent in 2017. The China Construction Bank climbed by 7 per cent on Thursday and the Industrial and Commercial Bank of China surged by 6.1 per cent.

“I am positive on China’s banks as they are the barometers of China’s economy,” said Zhou. “Financial deleveraging will actually be good to banks in the long run.”

Fidelity, however, remains cautious about China’s sovereign bonds this year, as the drive to cut the leverage ratio among domestic financial institutions and increases in borrowing costs by global central banks will add to further pressure, said Freddy Wong, the company’s bond fund manager.