Chinese equity investors, unsure of a sustainable bull run, place wagers on defensive plays

An index of consumer stocks has surged 60 per cent this year as the best-performing sector on the Shanghai Composite Index

The resilience of consumer stocks has called into question the sustainability of the gains in the benchmark so far

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Chinese investors react as they monitor stock prices at a brokerage house in Beijing. The market sentiment in China has cooled off a bit since the market peaked in April. Photo: AP Photo

Published: 4:50pm, 16 May 2019Updated: 8:22pm, 16 May 2019

There is a paradox in China’s world-beating stock rally this year: defensive plays are turning out to be the best performers.

While Chinese stocks have technically been in bull market territory this year following a 20 per cent gain in the Shanghai Composite Index, safe bets have been leading the charge so far. A gauge of consumer staples companies, from liquor distillers to dairy and food seasoning makers, has climbed 60 per cent, outperforming all other sectors.

The resilience of consumer stocks has baffled investors. Some say the scenario adds to evidence that there has never been a bull market, while others argue the quick gain in stock prices and ballooning turnovers are convincing signs of a raging bull.

The stock market sentiment has looked shaky recently, with the Shanghai Composite down almost 10 per cent from an April high. Overall corporate earnings have failed to catch up with share-price gains; economic growth is showing signs of decelerating again and a trade war against the US has flared up once again.

“It’s not a full-fledged bull market, as there are only a handful of stocks holding on to sizeable gains,” said Wang Chen, a partner at Xufunds Investment Management in Shanghai. “For a full-fledged one, you will need to have loose liquidity and economic prosperity. But the latest data seems to corroborate the argument that growth hasn’t bottomed out. So smart money has no choice but to chase those companies with stable earnings growth and cash flows.”

The Shanghai Composite had climbed as much as 31 per cent through April after a detente in the trade spat and a stabilisation in the economy spurred a buying binge. The rally has quickly run out of steam as the economic data deteriorated again and the trade spat re-escalated. Some of the hottest and speculative trades, such as plays linked to China’s new technology board and the outbreak of the African swine flu, began to unravel, giving up most of the gains.