Shanghai stock picker foresaw last year’s slump. Can his 2019 prediction move China this year?
- HSBC Jintrust fund manager Shi Xingtao says Chinese stocks may reverse their downward trend as early as first half of 2019
A Shanghai-based fund manager who correctly forecast no gains in China stocks last year has said the mainland’s equity market, the worst performer globally in 2018, will perform better this year, as economic growth bottoms out and low stock valuations start attracting buyers.
Shi Xingtao, a money manager at HSBC Jintrust Fund Management, said stocks listed in Mainland China will probably stage a comeback as early as the first half, after a whopping 25 per cent decline in 2018. He said he favoured growth stocks and midstream companies in manufacturing based on the metrics of price-to-book ratio and return on equity.
“2019 will have better opportunities than 2018,” he said. “The risk premium of the market is already at a historically high level and that has largely reflected pessimistic expectations about the economy. Economic growth is expected to bounce back in the second half, and the market bottom usually comes earlier than the bottom of the economy.”
An optimistic mood seems to have returned to the equities market at the start of the year. By the afternoon on Wednesday, the benchmark Shanghai Composite Index had gained 0.7 per cent to 2,544.35, and was heading for a 2 per cent gain so far in 2019, after the government said it will introduce measures to boost consumption of home appliances and cars. The gauge was buffeted last year by an intensifying trade war with the United States and a government campaign to rein in the shadow banking sector.
The stock gauge is valued at 9.4 times estimated earnings for the following 12 months, compared with a record low of 7.7 times set in 2014, according to data compiled by Bloomberg.
Shi said investors might need to wait for the economy to end its down cycle on its own, rather than pin hopes on the government’s stimulus policies to quickly hold in check weakening momentum.
“There’s not much room for manoeuvre for policies on infrastructure and the property market, because of the debt burden on local governments and high-flying property prices,” he said. “Given the cycle pattern, the economy may reach the bottom in the third quarter, or thereabouts.”
Shi made a correct call on the market by refraining from adding stock holdings in the second half of last year, saying the risks of the trade war and a slowdown in the economy had not fully been exposed, while investment banks including UBS Group, the stock exchange and a top government official said the declines had already been overdone. He also correctly forecast a reversal in the run-up on Chinese liquor distillers last year, the hottest stocks in 2017, because of waning demand for alcohol amid slowing growth.
Shi’s HSBC Jintrust Dual Core Strategic Fund has returned 6.4 per cent over the past three years, beating 95 per cent of its peers, according to Bloomberg data. His top holdings included diesel engine maker Weifu High-Technology Group, China Resources Double-Crane Pharmaceutical and textile maker Bros Eastern by the end of the third quarter, according to a quarterly report.